The main macro-economic developments that will have an impact on German corporates
The stability of the EU, commodity prices and deflation risk are among the main economic factors that will affect corporates in Germany, Michael Karrenberg, regional director risk services Germany, Central, Northern and Eastern Europe and Russia/CIS at credit insurer Atradius says.
Speaking to StrategicRISK ahead of yesterday’s session on die Einfluss volkswirtschaftlicher Entwicklungen auf Europa und auf deutsche Versicherungsnehmer, Karrenberg believes these are the top five economic developments companies need to be aware of.
- The stability of the European Union. As many of the EU members are Germany’s main export partners, whether the EU stays together or breaks off in several parts will have a deep impact on the country.
- The volatility of commodity prices. Germany is an export country for high technology and therefore has a very high demand for commodities. Commodity prices have been very volatile in the last two years and this trend seems to be set to continue over the next years.
- The economy of China and the USA. After the EU, China and the USA are Germany’s main export partners. Furthermore, the two biggest economies in the world also influence the world economy and the economies of Germany’s EU partners.
- Deflation risk. A high risk in 2-4 years’ time, deflation is already an existing risk. While the European Central Bank has taken measures against deflation, it is still not clear if these will be successful.
- Structural risks. Germany faces a lot of structural risks, such as an ageing population; the need for investment in key technology infrastructure; and the need for the right environment for innovation.
Karrenberg also mentions risks related to the UK’s exit from the EU, the so-called Brexit, but says these would only be felt in the long term.
“When the referendum result was announced, there was a bit of panic, but this is now gone. Overall, we don’t expect a big impact of Brexit on the German economy in 2016. The impact might be a bit higher in 2017, but will still be manageable,” he explains.
“The reason for that is that there are many positive components which currently influence the German economy, such as a relatively low euro currency exchange rate, low oil prices, low interest rates and relatively low commodity prices. All these elements outweigh the negative effects Brexit might have.”
However, he believes that beyond 2017, if and when some of these positive components have disappeared, Brexit could have a more severe impact on the German economy and also on some corporates, although certain industries will be affected more than others.
“There are some sectors which are more dependent on exports to the UK or have representative offices there, such as the automotive, textile, footwear and chemical sectors. I think these industries will feel a stronger impact,” Karrenberg notes.
General elections across Europe next year, notably in Germany and France, could also have an impact on the economic climate, depending on their outcomes. Karrenberg doesn’t expect big changes, as he believes the more traditional parties will remain in power.
“But if some extreme right or left wing party wins the elections then we will definitely see some severe structural changes in future. A good example is Poland, where an extreme party won the elections and we now see the upcoming changes in Polish law, in tax regulations for example. We currently have a lot to do with VAT inspections in Poland and that will have a deep impact on Polish corporates and the economy. So if that would happen in Germany or France, then that would indeed have an impact.”
So how should companies manage these macro-economic challenges? Can they protect against all those risks or do they simply have to bear these kinds of economic risks as business risk?
Credit insurance could be of some help here, especially for multinationals, as it can cover some economic risks related to export or being active in other countries, as well as some political risks.
“But these are not all the risks you are facing. There are other risks like transport risk, copyright risk and so on. As a company you need to be very selective in your decisions on which country you want to enter and what partners you want to do business with,” Karrenberg says.
He adds that going into a country is always a long-term decision and companies therefore need to do their own economic research before making such a decision.
“Many German companies have taken these decisions in a very progressive way. Look at Russia for example. Ten years ago 500 German corporates had a presence in Russia. Nowadays we are talking about 6500 German corporates being locally present there. It’s the same for Turkey and other countries. They have taken the decision to go there, but now they face a very different political and economic landscape than ten years ago. Was that foreseeable? I’ve been doing this job for 25 years now and I must admit that some of these developments are hardly foreseeable.”