German recovery tempered by uncertainty

Germanys recovery has gained further momentum in the last three months, driven mainly by external demand, especially from Asia. According to the German Statistics Office, exports increased 9.2% on the previous month and 28.8% year-on-year in May the highest increase since May 2000.

The crisis-ridden machinery sector recorded a 37% increase in new orders between March and May, and both industrial production and construction have recorded regular increases in output in the last few months. However, although many industries severely affected by the crisis, like automotive, metals and transport, are recovering, it will take another two to three years before pre-crisis turnover levels are regained.

As always, when the economy rebounds after a recession, insolvency figures continue to increase in its wake. According to the German Statistics Office, the number of corporate insolvencies increased 6.7% year-on-year in Q1 of 2010 to 8,230 cases. However, in April business failures decreased 6.2% year-on-year the first decline since January 2009. The courts estimate the value of expected outstanding receivables to be 8.7 billion in Q1 of 2010 [Q1 of 2009: 9.7 billion]. Since it last report on Germany three months ago, Crédito y caución has revised its forecast for insolvency downwards, and now expect insolvencies to rise, for the whole of 2010, by less than 10%.

In terms of sectors, automotive suppliers, metals/steel, transport and engineering are still the main victims, and, increasingly, insolvency is hitting smaller businesses whose financial reserves have been depleted after 18 months of crisis and only modest recovery. Insolvencies in Information and Communication Technology and chemicals will probably stabilise, and in the construction sector may even decrease.

In May, the Expected Default Frequency [EDF] indicator in Germany increased slightly from the previous month: by three basis points, to 54 points. However, this is seven basis points lower than in February, the figure quoted in the last analysis on Germany by Crédito y Caución. 

According to the monthly Ifo institute Credit Constraint Indicator, in June barriers to finance fell again, indicating that, in recent months, it has become easier for German businesses to obtain bank loans. However, Credito y Caución still thinks that it is too early to talk of a turnaround. It remains to be seen if the volume of loans will be enough to satisfy increased business

Demands for finance triggered by the economic recovery, as many companies have to pre-finance increased orders, notably in the machinery sector. Overall, continuing restrictions on lending cannot be ruled out, and this is likely to hamper company investments considerably and, in the medium term, the recovery itself.

The future insolvency trend

The Credito y Caucións view for Germany is that economic performance in the second half of the year will be a clearer barometer of future insolvency trends, as the recovery that we have seen so far this year has been mainly as a result of companies restocking their inventory a factor that will not continue in the coming months. While prominent economic institutes have revised their growth forecasts for 2010 upwards - now in the range between 1.7% and 2.1%- in expectation of a further rebound, there are still some uncertainties and downside risks that could upset recovery. In May, the volume of orders received in manufacturing decreased, although the overall trend remains positive.

While strongly export-oriented industries, such as automotive, chemicals and machinery, will profit from a weaker euro when delivering to the US $ zone [USA, China], overall demand in the eurozone - Germanys largest export market - will probably be dampened by the austerity measures introduced in several member states. At the same time, some industries, such as IT, which import from the US $ zone, are disadvantaged by the weaker euro. The same goes for commodity-dependent industries such as steel and energy, whose liquidity is affected by increased commodity prices.

Moreover, the current economic recovery in Germany will probably not trigger a boost in private consumption, despite decreasing unemployment [down 0.4% in May, to 7.7%]. According to the German Statistics Office, turnover in retail decreased 1.3% year-on-year between January and April. While some construction subsectors are currently profiting from public orders in the wake of the stimulus package, they will face more difficulties next year when the programmes expire and new public projects decline because of the strained financial situation in many German cities and municipalities. This uncertainty means that many companies are still struggling to confidently forecast their performance and results expectations for 2010.