German Companies Struggle in Sluggish Economy: Würth Runs Out of Breath

Würth runs out of breath
Sluggish economy is causing problems for German companies

08/19/2023, 06:08 p.m

Although inflation is slowing down, it remains at high levels. Rising interest rates are making loans more expensive, and industrial production has surprisingly fallen recently. The specific effects of the sluggish economy are shown by the highlights of three companies of different sizes and sectors.

Anyone who wants to know how badly Germany’s economy is weakening will quickly find what they are looking for. The International Monetary Fund expects the economy to shrink by 0.3 percent this year – as the only one among more than 20 countries and regions examined. Although inflation weakened in July, it remains at a comparatively high level. Meanwhile, rising interest rates are making loans more expensive. The number of corporate bankruptcies has recently increased.

At the same time, industrial production fell surprisingly sharply in June. That gives a foretaste of poor production figures in the coming months, says Commerzbank chief economist Jörg Krämer. Ifo President Clemens Fuest said in July of his institute’s business climate index: “The situation in the German economy is becoming gloomy.” And the Federal Ministry of Economics gave little hope at the beginning of the week: “Current leading indicators do not yet point to a sustained economic revival in the coming months.” The specific effects of the sluggish economy are shown by the highlights of three companies of different sizes and sectors.

The baker Sebastian Brücklmaier has known the baked goods business since he was a child. The 31-year-old grew up in the bakery and is the sixth generation to run the Brücklmaier bakery. He employs around 70 people in five branches in Munich and three in the surrounding area. Its sales have risen due to inflation, but sales have fallen slightly. In general, the bakery trade is only moderately affected by economic phases. There are fewer absolute lows and highs, “perhaps because we are basic suppliers”. “In the past, I didn’t have such high room costs as I do today. It’s brutal, especially in Munich,” says Brücklmaier. Material costs have also risen steadily since Russia’s attack on Ukraine.

There is no alternative to Germany as a location

Price increases could only have partially compensated for the high costs. For some customers, the prices are now too high. In order to save, they resorted to discounter products. In other countries, people are willing to spend more of their income on food. “We have the greed is cool mentality,” says Brücklmaier about the Germans. His most acute problem is the staffing situation. “In the past, employers could choose their employees.” Today the tide has turned completely. There is no alternative to Germany as a location. As a bakery, he doesn’t have the opportunity to emigrate abroad. After all, he is a regional supplier.

The chemical group BASF is also suffering from the weak economy and comparatively high energy prices in Germany. The DAX company announced cuts in February, which also affect the main plant in Ludwigshafen. The bottom line is that BASF is cutting 2,600 jobs worldwide, almost two-thirds of them in Germany. At its headquarters, the group is shutting down several energy-intensive chemical plants – for example for ammonia – due to increased gas prices. This affects another 700 jobs in production.

With the savings programs, the fixed costs should be around one billion euros lower annually from the end of 2026. The group has already lowered its forecast for sales and adjusted operating profit for this year. CEO Martin Brudermüller has repeatedly complained about expensive energy and too much regulation in Europe. BASF is now investing more in the important Chinese market: Up to ten billion euros are to flow into the new site in Zhanjiang in the province of Guangdong. It is to become BASF’s third-largest production site in the world after Ludwigshafen and Antwerp. Critics complain that the group is becoming too dependent on the Far East and fear a Chinese attack on Taiwan given the geopolitical tensions.

Increased lending rates are hampering the construction industry

The retail group Würth from Baden-Württemberg has experienced a steep upward trend in recent years. In 2022, sales increased by around 17 percent – the company scratched the 20 billion euro mark. The operating result also increased significantly. The company is known for its assembly and fastening materials, such as screws. But after the first six months of the year, the rapid growth ran out of steam.

“After two years with record sales and operating results, the economy is now cooling off,” said Würth CEO Robert Friedmann in mid-July. In the first half of the year, sales increased by only 5.9 percent compared to the same period last year. The operating result fell from 720 million to 680 million euros. The company cites the increased interest on loans as one of the reasons, which is inhibiting demand in the construction industry, which is important for Würth. But higher costs and unrelenting price pressure are also factors.

“Against this background, we are very satisfied with the development in the first half of 2023,” said Friedmann in July. He hopes for falling interest rates, which are the most important impetus for investment. CFO Ralf Schaich said that Würth itself wants to continue investing, even if growth is a bit weaker and the measures are having a negative impact on earnings.