Dusseldorf, Berlin Rising prices and interest rates, high energy costs and the war in Ukraine weigh heavily on the future prospects of German companies – especially medium-sized companies. This is the bad news. The good news: Small and medium-sized companies have taken precautions and increased their cash reserves in the past financial year.
The liquidity ratio, which measures the ratio of cash to total assets, rose from 7.1 to 8.6 percent on average across all sectors at the end of the financial year. The vast majority of companies are therefore not at risk of over-indebtedness.
This is the result of an anonymous evaluation by the German Savings Banks and Giro Association (DSGV) of around 9,000 balance sheets, which is available to the Handelsblatt. It is about companies with an annual turnover of between 20 and 250 million euros.
Despite the difficult environment, companies managed to increase sales by an average of 14.4 percent last year – and profits by as much as 36 percent. But the economy is divided. “While some segments, especially the export-oriented sectors of the manufacturing industry, are increasing their earnings sharply, the consumer-oriented sectors are facing considerable challenges,” says DSGV board member Karolin Schriever.
In addition to the chemical and pharmaceutical industries, which are strong abroad, metal, mechanical engineering and vehicle construction have improved their profits disproportionately. In contrast, in the hospitality and private services sectors, profits collapsed by more than 40 percent. In the current year, high inflation is likely to cause problems, especially in the retail sector.
Economy: Expensive energy and low growth are a burden
As a result, the differences between the sectors in terms of financial strength in 2022 have become even greater. This trend is likely to continue in 2023 because dynamic markets such as Asia and the global economy are growing much faster than Germany. Companies with strong international business benefit from this.
On the other hand, companies and sectors primarily oriented towards the domestic market are suffering from the weaker growth in Germany. “In particular, energy costs will remain high, which is putting a disproportionate burden on the lower income brackets of private households,” says DSGV board member Schriever. This will have a negative impact on the industries dependent on it.
The latest economic data confirm this. Industrial production fell by 3.3 percent in March compared to the previous month. Retail sales have also fallen.
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High profits in industry
Last year, demand was still high, especially from abroad, and caused earnings in German industry to increase across the board. According to the DSGV, metal, machine and vehicle construction improved their sales by an average of 23 percent. Earnings before interest and taxes (EBIT) even increased by 40 percent compared to the previous year.
Looking ahead to 2023, this trend is likely to continue, provided the companies sell their products not only in the US but also in Asia. Because the strongest growth is likely to be in China this year after the communist government ended the strict corona exit restrictions.
In view of the high demand and catch-up effects, many companies can still successfully pass on rising prices for materials and personnel, so that the earnings situation should remain good this year. This has already been shown in the first few months of this year.
The energy-intensive industries cut production at the end of last year as a result of the high prices for gas and electricity. For several months, however, prices on the energy exchanges have been falling again and the mood in companies has brightened. Sectors such as chemicals and paper were able to stabilize their production.
Between December and February, production in the energy-intensive sectors increased by a total of 7.5 percent, according to data from the Federal Statistical Office. However, further recovery is not a foregone conclusion. In March, production in the energy-intensive industries fell by 3.3 percent.
Construction and Real Estate: Robust in the approaching crisis
What is striking is that within a year, one industry has almost doubled its earnings before interest and taxes (EBIT) on average. It’s about the German construction companies. The balance sheet analysis of the DSGV also shows that sales have “only” increased by five percent. This means that the industry was twice as profitable in 2022 as in the previous year.
The companies succeeded in passing on disproportionately high material price increases to customers. The chronic shortage of skilled workers and building materials helped. The high demand met a low supply.
The good times for the industry are over.
(Photo: imago images/McPHOTO)
But the good times will be over for the construction industry in 2023. Sharply rising interest rates, which are driving up costs for property developers, and stricter bank lending requirements are reversing the trend. According to the Federal Statistical Office, the number of building permits fell in February for the tenth month in a row.
Only a good 22,000 apartments were approved in Germany, a fifth less than in the same month last year. Large real estate companies such as Vonovia have announced that they will not build new buildings this year.
Because the new construction business is sluggish, sales and profits in the construction industry, which has been booming for a long time, are likely to collapse this year. In this respect, companies did well to increase their equity ratios in the past year. For construction companies, they rose within a year from an average of 33.6 to 34.2 percent and for real estate companies from 38.2 to 40.8 percent.
Inflation: Rising prices threaten retail
In view of high price increases, the retail trade managed to increase sales by an average of 26 percent in the past financial year. But profits increased by only eleven percent. Profitability suffered as a result: Before taxes and interest, the companies only had an average profit of 4.4 percent, after 4.9 percent in the previous year. The equity ratio fell from 20 to 17.5 percent.
The industry is financed less than others and is therefore vulnerable to crises. In its economic report for April, the Deutsche Bundesbank analyzes that private consumption and consumer-related service providers are suffering in the first quarter from high inflation and the resulting reluctance to buy. Timo Wollmershäuser, head of economic activity at the Ifo Institute, explains: “The high inflation is sapping the purchasing power of private households and causing consumption to shrink.”
As a consequence, there is an increased threat of insolvency. The German Retail Association (HDE) expects that 9,000 businesses will give up this year. Due to higher costs, revenues and profits are under pressure. At the end of the year, 311,000 shops would remain nationwide.
According to preliminary data from the Federal Statistical Office, the number of insolvencies had already risen by 13 percent in March compared to the previous year – and the retail trade was particularly affected. The fashion manufacturer Ahlers recently announced that it would file for insolvency at the Bielefeld District Court due to imminent insolvency.
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Gerry Weber had previously applied for a stabilization and restructuring process. The fashion chain Peek & Cloppenburg and the shoe retailer Görtz entered protective shield proceedings.
Consumption: Hospitality and service providers with heavy losses
It looks most difficult in sectors that are suffering directly from the falling income of private households and that already had to accept a drop in earnings in the past year. Companies in the hotel and catering industry as well as private service providers such as concert organizers, museums, sports facilities, cleaning services and hairdressers increased their sales in the past financial year.
But that came at the expense of profitability. Profits collapsed due to massive cost increases of 47 percent in the hospitality industry and 57 percent in the private service providers. In 2021, it was still possible to pass on higher prices to customers because consumers felt a need to catch up after the lockdowns in the corona pandemic. But that was no longer possible in 2022.
According to estimates by the IfW, private households had forgone consumption of around 200 billion euros during the corona pandemic.
The hospitality industry and service providers in particular had hoped for a strong expansion after the end of the corona restrictions. In January 2022, the federal government had also forecast an increase in private consumption of six percent.
However, sharp price increases for gas and electricity as a result of the Ukraine war ensured that households used a large part of the savings simply to maintain previous consumption. Ultimately, according to the Federal Statistical Office, private consumption rose by only 3.4 percent in 2022.
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There is no sign of an improvement in the situation, particularly among the self-employed, who make up a large proportion of the hospitality and service sectors. This is confirmed by the new evaluation of the Ifo-Jimdo business climate index, which is available to the Handelsblatt.
The business situation of the self-employed fell by 6.6 points between March and April to 1.3 points. “In April, the development of the solo self-employed and micro-enterprises ran counter to the economy as a whole,” says Katrin Demmelhuber from the Ifo Institute.
In the economy as a whole, current business has also declined, but only slightly by 1.1 points to 16.4 points. The index for micro-enterprises and the self-employed is based on surveys by the Ifo Institute in cooperation with the IT service provider Jimdo.
The more difficult situation is also related to the fact that the labor shortage is most acute in the hospitality and service sectors. Many employees have reoriented themselves to other areas during the pandemic-related restrictions and are now not coming back.
“We see that employees do not want to work in certain areas and under certain conditions and in the current situation no longer have to,” says economist Simon Jäger, head of the Institute for the Study of Labor (IZA). According to the industry association Dehoga, there were around 50,000 vacancies in restaurants and cafés, hotels, guesthouses and similar businesses.
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