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Tuesday
Jan102012

Germany’s Export Debacle

Christine Lagarde, managing director of the IMF, told the South African Business Day yesterday that the Eurozone is likely to avoid a recession in 2012, an inexplicable statement in light of some ugly trends. Germany, the economic superstar with unemployment at a 20-year low and exports at an all-time high, produces 34% of the Eurozone’s GDP—and it has smacked into a wall.

Signs have been accumulating. But on Tuesday, Deutsche Bank published a report that lent more weight to them: Germany’s economy, which shrank in the fourth quater of 2011, would also shrink during the first two quarters of 2012. The recession has arrived. Uncertainty around the debt crisis would impact the willingness of companies to make investments. Budget cuts in Eurozone countries would hit exports. Unemployment would tick up a notch to 7.25%. However, political progress in overcoming the crisis would allow exports, and thus the German economy, to recover in the second half. For all of 2012, Deutsche Bank predicted essentially stagnation.

And manufacturing revenues fell by 1.1% in November from October, though they’re still positive for the year, the Federal Statistical Office announced today. More ominously, export orders have been crashing for months—a harbinger of sharply declining future exports. In 2011, exports reached a record of €1.07 trillion. In a country whose GDP is only €2.37 trillion! But orders from non-Eurozone countries plummeted by 10.3% in November.

The debt crisis has been slamming one peripheral Eurozone country after another. Greece is teetering after five years of recession. Troika inspectors are on their way to demand yet more cuts. And the Prime Minister threatened everybody with the nuclear option. For more on the Greek debacle, read.... Greece’s Extortion Racket Is Maxed Out.

But now the core of the Eurozone is getting slammed.

Siemens shed doubts on its outlook. The forecast made in November is "very ambitious," cautioned CFO Joe Kaeser. "Headwinds have become rougher." In November, the technology conglomerate with $96 billion in revenues had announced a growth target of 5% for 2012. That’s out the window. Kaeser blamed uncertainties caused by the debt crisis and criticized the "hesitant" political steps taken to solve it. The whole sector would be hit by a reduction in industrial demand in the first half, though he still expected demand to improve in the second half (that second-half optimism is reminiscent of the one displayed by Ford, GM, and others in early 2008).  

There were company-specific clouds as well. Delays and uncertainties at large North Sea wind-power projects would darken the result for the first quarter. And he warned of more restructuring expenses at Nokia Siemens Networks. Siemens had desperately tried to sell it, but since no willing buyers emerged, it would have to lay off 17,000 employees, about 20% of NSN’s workforce.

And the European auto market is going to hit the skids in 2012, according to Carlos Ghosn, CEO of Renault and Nissan. Speaking at the Detroit auto show, he predicted that auto sales would drop 3% in Europe. The first quarter would be particularly lousy. How do you prepare for this? "You have to utilize your inventory, limit production, and pay attention to costs. And for the rest, pray," he advised.

It gets worse. Philips, the Dutch maker of electronics and lighting products, blamed weakness in Europe for declining sales in its healthcare equipment division—previously considered immune to the debt-crisis. The problems also pressured prices in its lighting division. The company had already announced that it would cut 4,500 jobs.

German exporters are getting hit from two sides: trouble in the Eurozone and slowing demand in China—its imports, up 22.1% in November year over year, were up a disappointing 11.8% in December. Suddenly, German executives are keeping a hopeful eye on Chinese monetary policy.

They’ve been through this before. During the financial crisis, German export orders fell off a cliff, and GDP printed the worst two quarters in the history of the Federal Republic. But then QEx-inflated demand elsewhere, particularly in China, drove German exports to a record. And by 2011, the media were gloating over the "German success Recipe." For its unique aspects, and for just how premature all the gloating was, read.... “German Success Recipe” or Blip?

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