German mechanical engineering industry remains robust in a difficult environment


Mechanical engineering companies in Germany successfully defied the trade policy storms in 2018 and even increased their workforces despite many uncertainties. "Our forecast for a production growth of 5 percent to a record 228 billion euros in 2018 is ambitious but feasible," said VDMA President Carl Martin Welcker at the association's annual press conference.

After ten months of the current year, the mechanical engineering sector recorded an increase in production of 3.7 percent. 2018 will thus be the second year of growth in succession. In the first ten months of the current year, incoming orders in the mechanical engineering sector increased by 7 percent compared with the previous year.

At the same time, the number of employees (in companies with more than 50 employees) in Germany increased by 34,000 to 1.067 million by September - an increase of 3.4 percent. "This shows that mechanical engineering companies are not afraid of the future and want to continue investing," explained Welcker. The number of people employed in the mechanical engineering sector is higher than 1.3 million, making the industry the largest industrial employer in Germany. However, companies are concerned about bottlenecks in the supply chains as well as among skilled workers. According to current surveys, 27 percent of machine builders in Germany suffer from a shortage of manpower, and 28 percent of companies have production problems due to a shortage of materials. "These bottlenecks could still limit growth this year," Welcker said.

 

2019 with less momentum
For the coming year, the VDMA economists expect real production growth of only 2 percent in mechanical engineering. It is expected that the pace of the global economy will slow down. This will also be felt in the mechanical engineering industry, which has an export quota of almost 80 percent. On the positive side, orders in the books currently still have an average range of 8.6 months. But the ongoing US trade dispute with China, into which the EU could be drawn even more strongly, the danger of a hard Brexit, the sanctions against Russia and Italy's debt crisis are only the most obvious obstacles to further growth. "We must prepare for that all these restrictions on free trade will also have a greater impact on mechanical engineering industry," said Welcker. On the other hand, the medium-sized industrial sector is hoping that the domestic market will continue to provide a sustained impetus: although investments have already picked up in Germany, they are still below average. "In addition, automation solutions offered by mechanical engineering companies become indispensable for many customers, especially in times of a shortage of skilled workers," said the VDMA President.

Wrestling for the lead between China and the USA
In the first nine months of 2018, exports by mechanical engineering companies from Germany rose by a nominal 5.2 percent to 131.9 billion euros.
China (plus 11.4 percent to 14.23 billion euros) and the USA (plus 6.9 percent to 14.16 billion euros) were competing head-to-head for the top spot in the export ranking, with a narrow lead for the People's Republic. However, the increase in exports to China during this period is clouded by the prospects of a weakening Chinese domestic economy, which is also suffering from the US government's punitive tariffs. At the same time, labor and production costs in China continue to rise. The economy in the United States is currently still benefiting from lower corporate taxes, although domestic investment is already weakening as well. "We therefore expect the EU to vigorously press ahead with negotiations on both a lean free trade agreement with the US and an investment agreement with China," Welcker demanded. In addition, the European Union is called upon in its own region to ensure greater cohesion among the member states, especially in the year of the European elections. Welcker stressed that in order to strengthen the economy within the EU, it would also be necessary to reduce excessive bureaucracy, which causes enormous additional costs, especially for small and medium-sized enterprises, and cited the national implementation of the Posting of Workers Directive as an example. Fitters or service specialists often have to travel to customers within Europe at very short notice - but this is in principle made impossible by the regulations.

 

Danger of hard Brexit remains
The Brexit continues to be a burden on business that is difficult to assess. Exports by mechanical engineering companies from Germany to the UK increased by 4.5 percent in the first nine months of 2019, but strong inventory build-up and early investment are likely to have played an important role here. The danger of a hard Brexit with all its hard to assess consequences remains alive until the British Parliament approves the exit agreement. "In view of the unclear situation, our companies must prepare themselves without hesitation for a hard Brexit. The chances of avoiding this scenario are getting smaller every day," warned Welcker.

Politics must not favour technology
The mechanical engineering companies have clear expectations of the future work of the grand coalition in Berlin. The VDMA President emphasised that "policy-making instead of personnel debates is now of utmost importance". This would include continuing to fight for free global trade, but also an innovation policy that promotes digitisation in many areas of society and at the same time is technology-neutral. "The state does not know better than companies and their customers which technology will prevail," warned Welcker. He also reminded the government of the promise of tax incentives for research, as stated in the coalition agreement. "The medium-sized industry is tired of being put off again and again here, while almost all other countries in Europe are already successfully using this instrument," Welcker summed up.