Country risk overview: GERMANY

After an excellent but atypical first quarter, the remainder of 2012 will be less favorable due to the deleterious effects of the European debt crisis on the regional economic climate as well as the slowdown in emerging countries and the United States. Despite continued strong demand from emerging markets, exports (50% of GDP) will slow sharply as a result of the very unfavorable economic climate in Western Europe (55% of export sales, including 40% for the eurozone).

However, the contribution of foreign trade to growth will be slightly positive because, at the same time, imports will further slowdown in line with investment. In fact, uncertainties are causing companies to postpone their investments. It seems, however, that a decline can be ruled out because of the fairly high production capacity utilization rate and the partial making up of the ground lost during the 2009 crisis.

Public investment will decline with the ending of the projects contained in the second 2009 stimulus plan. Larger investments in renewable energy (wind, solar and geothermal), the modernization of thermal power stations and the construction of natural gas power stations in readiness for the end of nuclear power generation in 2022, will take place at best only from the end of the year.

Household consumption and investment will underpin the economy

Support for economic activity will come mainly from the resilience of consumption and household investment. On the one hand, employment will stagnate, but on the other, household disposable income will increase significantly (2%). In a tight labor market, industry agreements concerning a third of employees have been concluded with significant wage increases (3 to 4%).

Retirees will benefit from the indexation of their pensions to wages. The major part of the increase in government revenues expected in 2012, as a result of the resilience of consumption and the increase in incomes will be redistributed in the form of end-of-year bonuses to civil servants, increases in housing and child allowances as well as student bursaries. Housing construction and renovation will increase, chiefly because of households’ distrust of financial investments and very low interest rates.

Satisfactory public and external accounts

As growth slows and budgetary policy is relaxed, the movement towards a balancing of the national accounts is going to slow down. The deficit is still expected to fall below the threshold of 1% of GDP. Nevertheless, debt will remain high (over 80% of GDP) but will continue to recede. The brake on debt included in the Basic Law, which provides for the Federal Republic’s structural deficit to be reduced to 0.35% between now and 2016, and the structural balance for the Länder between now and 2020 will not be sufficiently strict. The country’s structural deficit should effectively reach 1% of GDP. Thanks to the considerable trade surplus, there is a sizeable current account surplus, a situation unaffected by the fall-off in global demand.

Companies’ financial situation could worsen again

Despite the wage increases granted and rising commodity prices, in general companies have regained good profitability and considerable cash flow. A high product range quality level, buoyed by their substantial expenditure on research and development, allows companies both to control their prices, withstand import competition, both in their own market and abroad and thus take advantage of domestic demand reviving. But, significant growth slowdown could lead to relapse. As of 2012 beginning, incidents in paying have already increased a bit and some sectors, such as wind energy, processing industry and consuming electronic, are especially exposed. If the situation in banks worsen, some of them still fragile, access to banking credits will be difficult. It might be a difficulty for companies, especially small ad medium-sized ones which use loans.

· Solid industrial base (1/4 of GDP)

· High product range quality level and diversity of production contribute to competitiveness and profitability

· Innovation, Research & Development

· Strong foothold in emerging markets (1/3 of exports)

· Central role of export-oriented SMEs (Mittelstand) with a strong regional base

· Central and Eastern Europe integrated in production process

· Importance of the ports of Hamburg and Bremerhaven

· Demographic decline

· Lack of engineers

· Low female employment rate

· Highly dependent on world markets

· Predominance of the production and export of motor vehicles

· Persistent backwardness of eastern Länder

· Weakened banking sector

(Source: Country risk overview, The Coface economic publications)