Why 2018 Could Become a Record Year for Machine Manufacturers
The past year can be described as turbulent. Despite the many crises, the German economy steered from one success to another. For this reason, economic analysts and associations are predicting a very clear trend for 2018: upward.
Exactly one year ago, MM Maschinenmarkt predicted that the German mechanical engineering industry would face a year of challenges, but also of opportunities. There is no doubt that these opportunities have been grasped. The German economy is running at full steam ahead, the number of unemployed is at its lowest level since reunification, and leading economic research institutes have significantly raised their GDP growth forecasts for 2017. For example, the Ifo Institute now expects the economy to grow by 2.3 % instead of the previously predicted 1.8 %.
“The German economy is booming," says Ifo President Clemens Fuest. "The momentum of 2017 extends well into 2018." For this reason, the experts have once again adjusted their forecast for 2018 shortly before the end of the year. Instead of the previous 2.0 %, analysts now expect a growth rate of 2.6 %. This would be the strongest growth since 2011:"Many sectors are flourishing, from construction and industry to trade, which is why the Ifo business climate index is rushing from one record to the next," explains Timo Wollmershäuser, Head of Ifo’s Economic Analysts. If the number of working days would not be this low in 2018, Germany would even register a growth rate of 2.5 % this year. The Ifo Institute expects an economic growth of 2.1 % in 2019. Overall, the forecasts of German economic experts for the country’s GDP in 2018 range between 2.0 % (Commerzbank) and 2.6 % (Ifo-Institut).
Export as a Growth Recipe
The success of the German economy is built on exports. And export figures have risen sharply in 2017. In November 2017 alone, goods worth € 116.5 billion were exported from Germany while goods with a value of € 92.8 billion were imported, the Federal Statistical Office reports. This represents an increase of 8.2 % and 8.3 % respectively, compared to the previous year. At the same time, production rose by 3.4 % compared to the previous month, the strongest increase in eight years. According to the statisticians, industrial production even grew by 4.3 % compared to the previous month.
Economists at the Organization for Economic Cooperation and Development (OECD) estimate that the global economy will grow steadily by more than 3 % in the next few years. In Germany in particular, growth is expected to amount to 2.5 % in 2017, but will slow down slightly over the next two years. The OECD also forecasts a dynamic development of 3 % for Austria, which is expected to contract slightly during 2018 and 2019. The Swiss economy will recover significantly in the next two years after a weak year in 2017 (0.8 %), the organization predicts.
Positive Outlook for Machine Builders
In 2017, the German mechanical engineering industry was very satisfied with the production growth of 3 % and sales of more than € 220 billion. VDMA President Carl Martin Welcker told the press in Frankfurt am Main that the year could "be described as an upswing year". Growth of 3 % is also expected for 2018, which means that the momentum will remain constant and sales will exceed € 230 billion. However, it is important to keep an eye on developments in the largest customer countries, as these would of course have the greatest impact on economic activity, especially China and the USA. The VDMA does not anticipate a drastic change of course in China but expects a more moderate growth compared to 2017.
“We will feel the effects of this development, but hoping for a 3 % growth in our forecast, we have certainly priced it in," Welcker said. The industry, on the other hand, has put an additional question mark above the US market. If the tax reform is passed successfully, this could have a dampening effect. However, the tax reform must be looked at very closely, because it also contains quite positive approaches. Take the immediate write-off of capital goods and the lower tax rates for example. This would be very much appreciated by German machine and plant manufacturers. As a matter of fact, machine builders have been demanding adjustments to German depreciation policy. Now, the US is approaching this topic very aggressively.
Question and Exclamation Marks Above US Trade
However, the reform plans of the US government also contain elements that pose significant challenges to the mechanical engineering industry and, above all, to large corporations regarding internal exchange of goods as well as import and export activity. Welcker admitted: "The reform plans are not yet formulated. We'll have to wait and see what comes." First of all, question marks are hanging above trade relations with the USA. Another problematic country that German machine manufacturers are keeping an eye on is Iran. Large western banks still don’t fund the country because the USA is putting pressure on them.
This boycott is not happening in the open, but it is made tangible by the fact that the US authorities reserve the right to hold any of them accountable for their Iranian business at any given time. No bank dares to tackle this business. Therefore, it is doubtful whether we can harvest the small seeds that we have planted there," Welcker emphasizes. Currently, exports of machinery manufacturers to Iran are up 24 %. It is uncertain whether this trend continues. According to the President of the VDMA, German industry is, of course, a very popular and preferred partner in Iran. The Iranians count on their assistance in building it up. German companies have built up and installed many of the existing basic structures of this country in the past. It is therefore obvious that they would continue to do so. However, the current political environment is very difficult.
Ramifications of Brexit Remain Uncertain
China, the United States and Iran are only three problematic countries in 2018 — others such as Russia or the United Kingdom add to the list. VDMA CEO Thilo Brodtmann expressed particular concern about the negotiations with Britain regarding their withdrawal from the EU: "Uncertainty in the UK business is high. This is our fourth largest export market. Depending on the outcome of Brexit negotiations and whether a free trade agreement can be reached soon, it makes a huge difference to future business relations. There is little time and we have to wait and see what can be achieved in the remaining time until 2019.”
“If things are going well, it's good, but the risk of us running out of time on the road is high," Brodtmann said. The British government has been showing a certain cherry-picking strategy and wants to choose certain parts of the EU agreements with Norway, Switzerland and Canada for themselves. Of course, they didn’t succeed. In view of the regrettable departure of Britain from the common market, the EU and the EU Commission consider negotiating a free trade agreement based on the Canadian model. He argues that this model was the most mature and modern agreement the EU has to offer. Britain assumes that the free trade agreement could be reached within two years. On the other hand, the negotiations with South Korea, which was the fastest agreement concluded so far, took five years.
Hopes for Domestic Demand
VDMA chief economist Ralph Wiechers was quite confident regarding the economic development of mechanical engineering: "We have to deal with a fairly broad range of cycles in our international business. This has been going on for some time now." For 2018, the first signs pointing to increasing domestic demand are very promising. From August to October 2017, order intake in the mechanical and plant engineering sector increased by 6 %. Although this is still far less than the growth in foreign business, this still constitutes a slight recovery, which is urgently needed. In Germany, a reluctance to invest had to be overcome, which was still due to the past economic crisis and the subsequent political measures.
In its sector report on German mechanical engineering, Commerzbank assumes that production will continue to grow by more than 2 % in 2018. This was due to robust economic development in Germany and the world, as well as to a revival of companies' investment activity in plant and equipment. The industry average EBIT margin will therefore remain roughly constant at 5.1 %. The industry's total turnover will increase by a robust 3 % next year.
Against the background of increasing industrialization, China and other emerging markets will continue to demand products from German machine manufacturers in the future. The business climate in the German mechanical engineering industry has not been better in the past five years than it is now. Despite fiercer competition, capacity utilization is now exceeding 85 % again," says Dr. Alexander Mann, Sector Head Industrials at Commerzbank.
The conditions for a successful 2018 could hardly be any better. Uncertainties remain, however. Some of these, such as the sluggish course of the Brexit negotiations, could have a major impact on the economy. The protectionist behavior of the USA, the most important export country for German mechanical engineering, could also cause great damage.
This article was first published by MaschinenMarkt.
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