Expected recovery in Germany in 2010

Crédito y Caución expect that the recovery will pick up speed in Germany en 2010, but there is the danger that restrictive bank lending could hamper business and economic growth.
Analisis Credito y Caución
Madrid - 15-fev-2010

Germany has continued on its path to recovery in the last quarter of 2009, after output rose 0.4% in Q1 and 0.7% in Q2 of 2009. Most economists are moderately optimistic for 2010, forecasting growth this year of between 1.2 % and 2.0%. This underlines that the recovery will pick up speed, although not enough to compensate for the massive slump experienced at the end of 2008/beginning of 2009.

This mildly positive outlook is also reflected in rising business confidence. In terms of trade sectors, energy suppliers, pharmaceuticals and food rate their business situation as positive, while metals, engineering and automotive assess theirs as bleak. Looking forward, the chemical industry voices a very positive outlook, while in the engineering and the printing industry pessimism prevails.

However, from January to September 2009, the number of corporate insolvencies increased 11.2% year-on-year, to 24,717 this was an improvement on the 15.3% increase between January and July. Despite the increased momentum of Germanys economic recovery, we still expect corporate insolvencies to rise 10%, to about 32,200 companies, for 2009. This trend is expected to persist in 2010 - to 35,500 insolvencies - while the value of outstanding receivables will decline considerably compared to 2009. The sectors mainly affected are automotive, metals/steel, and engineering. Last year, 90 enterprises went insolvent in the automotive supplier subsector alone: an increase of a massive 330% compared to 2008. Metal processing registered a 140% rise and engineering a 100% increase in the same period. Construction, electronics and retail have been less severely affected.

In November 2009, the Expected Default Frequency (EDF) indicator for Germany dropped compared to the previous month, reaching its lowest level in 2009. While generally decreasing, the current German EDF levels remain nearly twice as high as in the summer of 2008, still indicating elevated default risk among listed companies.  

Will tighter lending conditions hamper the return to robust growth?

While many of Germanys macroeconomic indicators are again positive, there is the danger that restrictive bank lending could hamper business and economic growth. Towards the end of 2009, enterprises´ complaints about difficulties in accessing loans have increased. In December 2009 44.3% of companies stated that bank lending has become restrictive, a 1.4% increase on the previous month, with the construction industry showing most concern (50%).

To counter a potential credit crunch in 2010, the German government convened a high level summit of top-ranking representatives from banks and companies in early December. The outcome was a promise by banks to provide more credit, especially to small and medium-sized businesses (SMEs), and the appointment of a "credit mediator" to foster dialogue between banks and German SMEs that have insufficient access to credit. Additionally it was decided that both banks and the state-owned KfW bank will jointly revive the collapsed securitisation market. We see the latter as a very important step in reviving the refinancing market for banks and enhancing their scope for providing new company loans.

Despite all the politically driven initiatives to avoid a credit crunch, the main issue will be how banks respond to the deterioration of many borrowers´ ratings once they have disclosed their 2009 annual accounts. If credit decisions are based solely on 2009 accounts, without taking into account the improved business outlook and (probably) better 2010 interim accounts, a credit crunch may happen. The challenge for banks will be to analyse companies´ balance sheets in a forward-looking way, with special attention on lenders´ business expectations and outlook in 2010.  

Construction and Textile sector

The economic crisis since autumn 2008 has begun to hit the German construction sector 6 months after its start. Between January and September 2009, new orders decreased 7.5% and turnover fell 6.8% year-on-year. The payment behaviour of construction companies has not worsened compared to other industries, although recorded payment delays are more frequent in the case of construction enterprises delivering to the public sector, which itself often has rather long payment periods. Crédito y caución expect the current performance of the construction industry to continue into 2010, sustained mainly by continued public spending. It is estimated that, at -1.5%, the decrease in turnover will be lower than in 2009. Housing construction is expected to recover slightly, while public construction is expected to increase 8%, as many infrastructure and public building projects envisaged in the stimulus package and approved in 2009 will begin in 2010. Commercial construction will rebound only after a sustainable and lasting recovery of the economy. Turnover is expected to decrease further - by 10% in 2010.   

In the textile and clothing industry, the number of employees decreased 10.4% between October 2008 and October 2009, and this trend will continue in the medium-term. Turnover has decreased 16.8%, with pre-producers affected most (-20.6%), while the clothing subsector has been less hard hit (-12%). With declining exports and fewer orders from German retailers, production and orders also declined on a two-digit scale. Private consumption will probably deteriorate in 2010, due to rising commodity prices and unemployment and a higher saving quota. This could negatively affect the whole textile sector in terms of fewer customers, decreasing turnover and increasing price pressure.

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