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Europe’s Week Ahead (May 11-15): German Autos Help Shift Growth Into Reverse

By:

Senior Market Analyst at Interactive Brokers

The pace of economic growth in Germany is set to contract in the first quarter of 2020, as the coronavirus crisis spurs a crash in the country’s vehicle-led exports.

While Germany’s beleaguered auto sector struggles to rev into gear, overseas demand for its goods has plummeted, as the country’s top trading partners continue to battle with the Covid-19 pandemic.

German Exports Hit Record Lows

The International Monetary Fund (IMF), for example, foresees a massive plunge in the economies of most buyers of German goods in 2020, including a near 6.0% decline in U.S. GDP, a 6.5% drop in the UK, and slowdowns of more than 7% in France and the Netherlands. 

In fact, outbound shipments from Germany had plunged by a record 11.8% in March from the prior month, as fall-out from the coronavirus affected countries globally.

Germany's Top Export partners in 2019

The European Commission (EC), which expects German GDP to decline by around 6.5% in 2020 before rebounding in 2021, noted that Covid-19’s adverse impacts on domestic demand and the services sector are likely to have caused growth in the country to contract in the first quarter of the year.

The EC further said that Chinese factory shutdowns in March also impeded German manufacturing, and along with lingering limitations on social life and travel, and impaired foreign trade, Germany’s economy is “now set for the deepest recession since WWII.”

German GDP growth is likely to have contracted by more than 2% in Q1 2020, with economists surveyed by Bloomberg anticipating a 2.3% slowdown.

German Economy feaces worst recession since WWII, GDP set to plummet in Q1'20

Cars Stall

Against this backdrop, Germany’s export-driven economy has mainly been beset by material damage to its auto industry, which many in the market expect to deteriorate further as the novel coronavirus continues to inflict global carnage.

The Ifo Institute for Economic Research recently noted that the business situation in Germany’s automotive sector has grown “dramatically worse,” according to its latest Business Climate survey.

Current business sentiment in April fell to -85.4 from -13.2 in the previous month – the biggest drop, and lowest value, since the index began following Germany’s reunification in 1990. The latest number also eclipses the prior low of -82.9 set in April 2009, during the financial crisis.

German vehicle manufacturers expectations over next 3 months (2020)

Klaus Wohlrabe, Ifo’s head of surveys, said that the institution has never before “seen such poor figures for this key industry,” amid shrinking order books, rising inventory, and significant decline in capacity utilization.

Export expectations in April sank to minus -64.9 from -43.9 in March, and Ifo highlighted an “even bleaker” picture for business expectancy over the coming months, with that index slipping to -45.7 in April from -34.6 in the prior month.

Slow Turns

Indeed, Germany’s reliance on its auto industry to help support its economy has come under siege in the wake of containment measures to prevent the outbreak of the coronavirus.

As of April 20, exports and imports of German motor vehicles, trailers and semi-trailers amounted to more than €223.5bn and €127bn, respectively, comprising the lion’s share of all nationally produced products.

Top 10 German Exports by Share of Total and Value

IHS Markit economist Phil Smith recently observed that the virus-spurred nosedive in German output comes as “large numbers of manufacturers either temporarily closed factories or cut working hours amid a collapse in export demand across Europe and the U.S.,” as well as amid mounting supply chain challenges.

He continued that even as “more manufacturers start to come back on stream, there are still some huge question marks, like what kind of demand conditions are they returning to, and for how long will supply chains be impacted.”

Smith added that manufacturers generally expect disruption to supply and demand to continue “deep into 2020 at the very least, making the chances of a V-shaped recovery unlikely.” Many in the market anticipate a prolonged recovery in Germany, with automakers struggling to reopen factories and resume production, as workforce reductions in the sector are expected continue to spiral southwards.

German auto industry suffers covid-related losses

Stop & Go

Unsurprisingly, auto manufacturers have been generally eager to jump-start their facilities and resume business-as-usual production.

Volkswagen (VOW.DE), for example, recently said it restarted its Wolfsburg plant, as it aims to gradually reopen its factories, amid certain German federal and state government decisions, as well as a loosening of virus-related restrictions in other European states.

Ralf Brandstätter, COO of Volkswagen’s Passenger Cars brand, said that additional momentum “is needed to stimulate demand in Germany and throughout Europe so that production volumes can be successively increased.”

Daimler has also taken steps to resume activity after suspending most of its production and resorting to domestic ‘short-time’ work policies in early April.  The firm recently jump started its Mercedes-Benz car plants in Untertürkheim, Berlin, Hamburg, Sindelfingen and Bremen, with a focus on continuing its product and electric initiative.

Daimler added that with this production ramp-up, Mercedes-Benz has also recommenced servicing China – its largest sales market – where it is “seeing a significant increase in demand again.”

Despite the positive production shifts, however, perceived confidence about the creditworthiness of some of Germany’s investment-grade auto companies remains shaky. Over the past six months, five-year credit default swap (CDS) prices have risen on firms such as parts-supplier Schaeffer (SHA.DE), Volkswagen, and Daimler. 

CompanyMoody’sS&P GlobalFitchSpread (bps)6 mos Change (bps)
SchaefferBaa3BBB-BBB-327168
VolkswagenA3BBB+BBB+186107
DaimlerA3BBB+BBB+162.5104
Source: Bloomberg

German automakers have also shed between 20% and 40% of their stock value year-to-date in 2020, including Daimler (-37.4%), Volkswagen (20.7%), BMW (BMW.DE-30%), and auto parts manufacturer Continental (CON.DE, -32.3%).

Over the same period, shares of the iShares MSCI Germany ETF (NYSEARCA: EWG), which includes among its top holdings software producer SAP (NYSE: SAP, 11.9%), financial sector firm Allianz (OTCMKTS: AZSEY, 7.5%) and industrial manufacturer Siemens (OTCMKTS: SIEGY, 6.7%), have fallen about 19.8%.

Investors concerned with Germany’s economic and financial well-being will most likely be eyeing the critical data releases in the week ahead closely for further developments on the trajectory of the country’s pace of growth and recovery.

On the Economic Calendar:

Thursday, May 14

  • Wholesale Prices (Apr)
  • CPI (Apr – Final)

Friday, May 15

  • PPI (Apr)
  • GDP (Q1’20 – Prelim)

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

IBKR TWS event calendar
Disclosure: Interactive Brokers

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