German Profit Warnings Signal Trade Woes May Bring On Recession

Bloomberg

Published Aug 15, 2019 06:00

Updated Aug 15, 2019 07:16

German Profit Warnings Signal Trade Woes May Bring On Recession

(Bloomberg) -- Germany Inc.’s outlook for the rest of the year is filled with gloom, suggesting a recession could be in the cards.

Companies from Europe’s largest economy lead the list of profit warnings issued in the region during the latest earnings season. Daimler, BASF, Continental, Henkel, Lufthansa and Metro are among those that have cut their outlook. Many more have drawn bleak pictures of their prospects.

The combined misery of corporate Germany was highlighted on Wednesday, when a report showed a quarterly contraction of the economy, the second in the past year. Surveys for the third quarter have hinted at a further deterioration, with a manufacturing gauge firmly pointing to shrinking output.

At the heart of companies’ concerns are weaker global growth, dwindling demand from China, and trade tariffs -- factors that hurt Germany’s export-heavy industrial sector in particular.

Industrial companies have fared worst during the second-quarter earnings season. Expectations for German businesses were comparatively low, but even so, only 41% of them managed to beat sales estimates. The ratio is well above 50% in France, Italy and Spain.

The consequences are starting to be felt. Unemployment rose by a total of 62,000 in the three months through July and demand for new workers continued to soften.

That’s bad news for a country hoping to make up dwindling exports with consumption and investment. Domestic demand still supported the economy in the second quarter but that might change once uncertain prospects prompt companies and households to rein in spending.

Economists at Deutsche Bank (DE:DBKGn) and ABN Amro Bank see Germany’s economy contracting again in the third quarter, pushing the nation in recession -- it’s first in six and a half years. Many more analysts say the risk of such a scenario has increased significantly after Wednesday’s report.

European banks are already preparing for an economic slump. Loan-loss provisions have risen for a second quarter, after declining during all of 2016 and 2017.

Shares in Commerzbank (DE:CBKG), which has revamped its business model to focus on lending to corporate and individual clients in Germany, have slumped to a record low.

“Earnings are shrinking and entire sectors are in deep crisis,” said Andreas Lipkow, a strategist at Comdirect Bank. “The current effects of the trade conflict between the U.S. and China have noticeably arrived at German export companies.”