Thursday, October 31, 2024

Industrial slump leaves Germany on brink of recession

By AFP
October 30, 2024

News that Volkswagen plans to close at least three factories in Germany and slash tens of thousands of jobs has added to the country's economic woes - 
Copyright AFP/File JENS SCHLUETER

Michelle FITZPATRICK

German output likely contracted again in the third quarter as an industrial slump drags on, official data is expected to show Wednesday, tipping Europe’s largest economy into recession.

Federal statistics agency Destatis will unveil its quarterly GDP estimate at 10am (0900 GMT).

The economy ministry has said it expects “a renewed slight decline” after gross domestic product already shrank by 0.1 percent in the second quarter.

A technical recession is defined as two consecutive quarters of contraction.

“The German economy is unlikely to have emerged from its weak phase in the third quarter,” the ministry said in its autumn forecasts this month.

Analysts surveyed by FactSet were narrowly more upbeat, predicting a quarter-on-quarter stagnation.

Other major European economies were also set to publish third-quarter GDP data Wednesday. The figure for the eurozone as a whole will likely be weighed down by Germany’s performance.

Traditionally a European growth engine, Germany has been hit hard by elevated energy costs in the wake of Russia’s war in Ukraine, sluggish domestic consumption following a period of high inflation and cooling export demand.

The headwinds have taken their toll on the country’s crucial industrial sector, which accounts for around 20 percent of German GDP.

“The manufacturing sector is running out of orders,” the BDI federation of German industries said in its latest report.

The BDI now sees factory output falling by three percent year-on-year in 2024, noting that this would be “the third consecutive drop”.

The downturn has been particularly visible in Germany’s flagship auto sector.

Volkswagen is considering closing at least three German plants and axing tens of thousands of jobs, labour leaders told employees this week, as Europe’s biggest car manufacturer confronts stiff Chinese competition especially in electric vehicles.

Volkswagen, BMW and Mercedes-Benz all lowered their annual outlook in September, citing falling Chinese demand.



– Government under pressure –


Long-standing structural challenges are adding to Germany’s woes, including complex bureaucracy, under-investment in infrastructure, an ageing workforce and a costly green energy transition.

Pressure is mounting on Chancellor Olaf Scholz’s government to take action, but the fragile three-party coalition is at odds over how best to turn the economic tide.

Economy Minister Robert Habeck, from the Greens party, last week proposed a multi-billion-euro investment bonanza to help German business.

But the idea was quickly shot down by hawkish Finance Minister Christian Lindner.

Lindner, from the liberal FDP, is a staunch defender of Germany’s constitutionally enshrined debt limits and has resisted calls from other coalition members to loosen the rules.

The International Monetary Fund has waded in on the debate, with its European head Alfred Kammer on Tuesday saying Germany needed structural reforms as well as public infrastructure investments.

To achieve this, he told the Sueddeutsche newspaper, “the debt brake can be relaxed”.

Germany was the only major advanced economy to shrink in 2023 and the government expects another mild contraction in 2024.

But it sees a recovery starting in 2025, when easing inflation and higher wages are expected to boost consumption.

German inflation slowed to 1.6 percent in September, the lowest level since 2021. October’s inflation figure is due later on Wednesday.


Volkswagen sees ‘painful’ cost cuts ahead as profit plunges

By AFP
October 30, 2024

Volkswagen is planning an unprecedented restructuring that could include thousands of job cuts - Copyright AFP/File PEDRO PARDO
Léa PERNELLE, Michelle FITZPATRICK

Ailing auto giant Volkswagen warned Wednesday that “painful” cost cuts were unavoidable as third-quarter profit plummeted, fuelling tensions with unions which fear mass job losses and factory closures on home turf Germany.

Europe’s biggest carmaker reported net profit of 1.58 billion euros ($1.7 billion) between July and September, down 64-percent from a year earlier.

The German group — whose 10 brands range from its core VW models to Seat, Skoda and Porsche — has been plunged into crisis by high manufacturing costs, a stuttering switch to electric vehicles and increased competition in key market China.

“We must intensify our efforts to remain competitive. And we have to act now. Any delay would be irresponsible,” Volkswagen finance chief Arno Antlitz said in a call with reporters.

The company is eyeing an unprecedented cost-savings push to turn the tide and dropped a bombshell in September when it said it was considering closing factories in Germany for the first time.

Worker representatives this week said at least three German VW plants were at risk and tens of thousands of jobs could go at the namesake brand, while remaining employees faced a 10-percent salary cut.

Volkswagen bosses have yet to comment on the details of the savings plan but have described the situation as “serious”.

“We are facing some difficult and painful decisions,” Antlitz said.

The savings proposals are focused on the core VW brand, which reported an operating profit margin of only two percent over the first nine months — far from the 6.5-percent targeted by 2026.

“This highlights the urgent need for significant cost reductions and efficiency gains,” Antlitz said, also citing a “challenging market environment”.

– Industry headwinds –

The group’s global vehicle deliveries fell by seven percent in the third quarter, with an increase in sales in North America failing to offset a 15-percent fall in China.

Deliveries of battery electric models were down 10 percent.

The group said results were also impacted by “higher fixed costs” and restructuring expenses.

Other German carmakers are facing similar headwinds, and Volkswagen in September joined BMW and Mercedes-Benz in cutting its outlook for 2024.

The manufacturers are also nervously watching the European Union’s decision to slap hefty tariffs on Chinese-made electric cars, which they fear could trigger a bitter trade war.

Volkswagen began a second round of talks with the powerful IG Metall union Wednesday, expected to shed more light on the savings plan.

Labour leaders have vowed to fight back against any plant closures, and strike action is possible from December when a truce period ends.

The IG Metall union is also seeking a seven-percent pay rise for workers, which bosses have rejected.

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