Brexit a drag on Germany’s export-dependent manufacturers

Germany's export-dependent economy is suffering from a Brexit shock that along with the rise in global trade tensions and structural changes in the car industry, threatens to push Europe's economic powerhouse into recession.

In the three months to June, exports to Britain dropped 21 per cent quarter on quarter, the biggest fall since the financial crisis a decade ago, contributing to the 0.1 per cent quarter-on-quarter contraction in GDP that Germany experienced in the same period.

“German growth is hurt by the slowing of global demand and Brexit,” said Hadrien Camatte, a macroeconomist at think-tank BSI Economics.

Andrew Kenningham, economist at Capital Economics, said: “Along with the threat of US tariffs on German autos, Brexit is a significant downside risk against an already very weak backdrop.”

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Border

Exports account for 47 per cent of gross domestic product in Germany, compared with only 30 per cent of the British and French economies and 12 per cent in the US. Germany sold €82 billion of goods to the UK last year; it is the UK’s largest source of goods imports and the UK is Germany’s fifth-largest export market after the US, France, China and the Netherlands.

Holger Schmieding, chief economist at Berenberg in London, said: “German exports to the UK are already 12 per cent lower than they would have been if the trend that prevailed before the June 2016 Brexit vote had continued.”

One contributing factor is the value of sterling, which has fallen 14 per cent on a trade-weighted basis since the 2016 referendum.

Klaus Winkler, chief executive of Heller, a German company that specialises in making crankshaft machines to mill engine parts, said Britain’s bid to leave the EU was “a pain in the neck”.

Heller, which celebrates its 125th anniversary this year, is based in the town of Nürtingen near Stuttgart in south-west Germany. Mr Winkler knows his company, and others like it, are on the economic frontline of the UK’s efforts to leave the EU.

Cars and car components are the UK’s largest imports from Germany and hundreds of Germany’s “Mittelstand”, or midsized industrial businesses, rely on the car industry and its suppliers. It comprises two-thirds of Heller’s sales.

But it is not only the car industry that is affected; Henrik Follmann, chief executive of Follmann Chemie, said he recently visited the UK operations of the German family-owned chemicals maker to reassure its more than 100 employees in Stoke-on-Trent and Southampton.

“People are scared for their jobs and scared for their future,” he said. “All I can say to them is ‘I believe in you’. The UK paper and packaging industry that we supply is thinking about moving facilities out of the UK - that is the big uncertainty.”

Trade

UK trade has not been all bad news for Germany. In March, when British businesses stockpiled in preparation for the original deadline to leave the EU, German exports to the UK were 10 per cent higher than in the same period a year earlier. “The UK’s stockpiling drive ahead of the March Brexit deadline was a key support to German exports in Q1 2019,” said Oliver Rakau, economist at Oxford Economics.

But British businesses have since been working through the stocks they accumulated. Manufacturing production contracted in both May and June. German total exports also fell, and net exports were the largest drag on German growth in the second quarter.

“The negative payback in Q2 was massive and explains about half of the sharp drop in German exports,” said Mr Rakau.

Some stockpiling activity ahead of the new October 31st Brexit deadline might create a short-term boost for Germany’s exporters. But in the longer term, economists say the downside risks are greater. Mr Kenningham predicted German exports would fall 10 per cent in the first six months after Britain left the EU - shaving 0.2 per cent off overall GDP.

“Bad news on trade or Brexit would probably push Germany into a genuine mild recession,” said Mr Schmieding.

A no-deal Brexit presents two challenges for Heller. First, like any German exporter to Britain, it could be hit by delays and higher tariffs.

It got a foretaste of that in March when extra checks at French ports delayed deliveries by about five days. “We can’t wait so long,” said Mr Winkler. “Our customers need reliable days for delivery - these machines cost a lot and are very expensive if they are not available.”

And it faces a double whammy because it also has a sizeable UK production site in Redditch, where it employs 165 people, assembling parts sent from its Nürtingen factory before shipping the finished goods across the world. This is the area Mr Winkler frets about most.

Impact

“Our biggest worry is the short-term impact,” he said, estimating that half of its production by volume and a third by value will be affected by Brexit. “We will need far longer to deliver parts to our UK factory and even longer to get final products back to our end customers.”

Mr Winkler said that eventually Heller may be forced to reconsider its UK operation.

“If we knew it would be a long-term border-check situation, we could move production from the UK to Nürtingen,” he said. “This is not something we want to do, because we have built a very qualified workforce in the UK that is competitive compared to our German workforce.” – Copyright The Financial Times Limited 2019