VDMA: Stagnation followed by a slight increase in growth

Haver & Boecker

Despite all the difficulties on many important foreign markets, mechanical engi-neering companies expect a slight upturn in their business in the coming year.

  • Mechanical engineering expects production to rise by one percent in real terms in 2017
  • Important foreign markets remain problematic
  • More than one million people employed
  • Avoiding new trade barriers in Europe

Despite all the difficulties on many important foreign markets, mechanical engineering companies expect a slight upturn in their business in the coming year. “We rely on the resilience, adaptability and innovative power of our mechanical engineering companies,” declares VDMA President, Dr. Reinhold Festge, fiercely. “Our production projection for 2017 is therefore a real-terms increase of one percent.”

For the current year, VDMA economists have affirmed their prognosis that a zero growth rate is all that will be achievable in real production. “Considering the weak global economic conditions and ongoing political disruptions that have a substantial impact on our business, we regard this result as a success. But more than zero is just not on the cards for us at the moment,” Festge emphasizes.

2016: Growth in the world economy is not enough
According to current projections, the world gross domestic product will only increase by 2.7 percent this year. This would be the lowest rate since the financial crisis in 2009. “That is not enough for mechanical engineering to get up to speed. To do that, the growth rate would have to reach more than three percent,” explains VDMA Chief Economist Dr. Ralph Wiechers. China in particular has failed to drive world growth this year – a fact that has had some serious consequences for more than just German mechanical engineering. Other countries or regions are unable to fully compensate for this weak investment, which is compounded by new insecurities in important sales markets such as the United Kingdom and Turkey. As a consequence, machine exports from Germany between January and July 2016 were down 3.4 percent in real terms when compared to the same period of the previous year. However, the export climate in the mechanical engineering sector has recently become somewhat friendlier, making it likely that further a decline in exports can be avoided.

After seven months, production only slightly down on the previous year
During the first half of 2016, mechanical engineering companies in Germany even managed to increase their production slightly by 1.1 percent in real terms. Due to an exceptionally bad result in July (minus 9.3 percent), the figures for the seven-month period from January to July show a slight fall of 0.3 percent. “Thanks to calendar-related effects, we see real chances of balancing out the July minus in August,” predicts Wiechers. “We have the necessary capacity.” Employment at mechanical engineering companies remains stable, at an almost record level. 1.01 million people were employed in the mechanical engineering industry in Germany in July 2016.

Prospects for 2017
“After years of disappointing waiting, it is naturally hard to put hope in a new global recovery,” says VDMA President Festge, describing the feelings of many mechanical engineering companies in Germany.  “The list of impedances to growth is long, and we have to make sure that Germany does not fall behind technologically due to its persistently weak investment climate.” The continued low raw material prices are having an immediate negative impact on several raw material-related sectors. The many unresolved geopolitical crises, the unpredictable result of the presidential election in the USA and the many unanswered questions regarding Brexit all indirectly impede investment, and are thus damaging to the demand for virtually all mechanical engineering products. Furthermore, there is the issue of the upcoming parliamentary election in Germany. “Both in Germany and worldwide, growth is primarily caused by consumption and construction,” explains VDMA Chief Economist Wiechers.

All around the globe, there are opportunities for new growth in mechanical engineering in places where production is being automated and digitalization is progressing. As a driver of this development, mechanical engineering companies can benefit disproportionately from these trends. Growing demand thus automatically increases the competitiveness of the customers.

European neighboring countries, for whom slight growth is expected in 2017, are some of the participants in this process. The same is true for the USA. Even some emerging countries have seen an increase in demand. “On a national level, we hope that demand in Russia and Brazil has bottomed out,” says VDMA President Festge. China remains the great unknown. In the short term, the economic stimulus package implemented and the unchanged desire to increase the quality level of the industry is likely to stabilize the demand for German machines. On the other hand, numerous risks such as the large shadow banking sector and enormously high corporate debt could pose a lasting threat to the country's economic stability.

VDMA Chief Economist Wiechers sums up the situation. “All in all, there are many signs that German mechanical engineering companies will succeed in at least maintaining if not improving on the previous year's level in 2017, despite an environment riddled with uncertainty. That is why we are predicting a real-terms increase of one percent for German machine production.”

Free trade is essential for prosperity
Mechanical engineering companies in Germany are observing the increasing distrust of free trade, as reflected by the clearly excessive criticism of the two transatlantic free trade agreements TTIP and CETA, with great concern. “Germany is a pioneer when it comes to launching new products on the world market, and we want to remain in this position. To do this, we need free trade agreements, particularly since they enable small and medium-sized companies to enter new markets,” says VDMA Executive Director Thilo Brodtmann. Three quarters of products made by German mechanical engineering companies are exported, and at least 600,000 people are employed for exporting products in German mechanical engineering. “This is why we continue to advocate the free trade agreement TTIP with a chapter dedicated to mechanical engineering,” Brodtmann emphasizes. The elimination of customs duties and the harmonization of technical rules offer great potential for cost savings when trading with the USA (between five and 18 percent per machine) and thus for new growth. “If the two agreements fail, a significant opportunity to simplify transatlantic trade, and thus to secure jobs, would be missed,” says Brodtmann. Failure would also send out the disastrous signal that comprehensive trade agreements with the EU are no longer as attractive as they once were. “In the long term, this could cost jobs,” warns the VDMA Executive Director.

“Policymakers in Europe must not bow to populists” 
In this context, the mechanical engineering industry is also concerned that nationalistic tendencies are spreading through the member countries of the EU – Germany included. “The EU economic area and the euro are what guarantee our jobs and our prosperity – now and in the future,” says Ulrich Ackermann, Head of the VDMA Foreign Trade department. The EU is the largest sales region for mechanical engineering companies; nearly 45 percent of all exports are made to other EU countries. Trade barriers, such as border controls as a consequence of the unresolved issue of refugees, are a burden on the companies.

Additionally, the looming Brexit could noticeably affect the foundation for trade with the United Kingdom – still the fourth largest export market and an important investment location. Already companies are unnerved by the uncertainty surrounding the withdrawal date, and this is endangering investment plans. Exports by German mechanical engineering companies to the United Kingdom declined by 0.8 percent in the first half of 2016. The UK's withdrawal from the EU makes the entire European project more difficult. “Under such conditions, policymakers must remain steadfast and not be short-sighted or disheartened in bowing to populism. The core values of the European Union need to be defended no matter what,” demands VDMA Executive Director Brodtmann.