Industry outlook 2022: Despite Omikron and lack of material: Companies are more confident than ever
On the contrary: there is great optimism for 2022. Whether precision mechanics, foundries, rubber processors, the corona-ravaged trade fair industry or the mining industry, which has been in crisis for years: none of the 48 business associations surveyed by the Institut der Deutschen Wirtschaft (IW) at the turn of the year anticipate a decline in production or business. That has never happened before and shows the extraordinarily high expectations for the economy.
According to IW boss Michael Hüther, three factors are responsible for this: “Catch-up effects, because the pre-crisis level has still not been reached. Second, catching up in view of the shortage of materials and major delivery delays. And third, historically high order backlogs. “
In 39 trade associations, the majority of companies are assuming a higher production level in 2022 than in 2021. These include all the important sectors such as chemicals, pharmaceuticals, automobiles, aviation, electrical industry, construction, handicrafts, retail, tourism and real estate.
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Four associations are even anticipating significantly higher production, including the employment-intensive sectors of mechanical engineering, steel and metal processing. On the one hand, this is likely to be due to the expected higher international investment activity. On the other hand, this also reflects the trend reversal in Germany’s key industry, the automotive sector, which is often hoped for by the sectors.
There are essentially two reasons for the good prospects: catch-up effects and investments.
Much pent-up demand
The recovery of the global economy, which should actually grow as fast in 2021 as it has not since the oil crisis in the 1970s, has stalled since late summer. The main cause is the lack of material and delivery problems because there is not enough container capacity on ships and truck drivers.
A country with strong exports like Germany suffers particularly from this. In October, industrial production in this country was only 2.8 percent higher than in the previous month. A real recovery as it had been prophesied had long since ceased to exist. “The ongoing supply bottlenecks are too heavy a burden for companies in the manufacturing sector, whose current production is around ten percent below the level that would be expected given the incoming orders,” says Ulrich Stephan, chief investment strategist at Deutsche Bank.
The discrepancy, at around 40 percent, is particularly striking among Germany’s car companies. But machine and electrical engineering production are also hit harder than average. “I therefore believe that overall noticeably weaker or even stagnating economic growth in the current and first quarter of 2022 is possible,” said Stephan.
In this context, the Munich Ifo Institute speaks of a “bottleneck recession”. On the one hand, the shortage of materials in German industry worsened in November. According to a survey by the economic research institute, 74.4 percent of the companies complained about bottlenecks and problems in the procurement of primary products and raw materials. The German auto industry is expected to produce almost a fifth fewer vehicles this year than last year. That would be as few as the last time in 1975.
It is also likely to get worse at the beginning of the new year before the situation eases. This is what 70 percent of wholesalers expect, as the industry association BGA determined in a survey of its companies. According to this, the supply of raw materials and preliminary products is currently secured for only three percent of wholesalers. In contrast, 44 percent of the companies surveyed spoke of “massive supply problems”. Accordingly, there is a lack of electronic parts and building materials, but also chemical substances and packaging.
But that also bodes well for the year as a whole. Many delivery bottlenecks are limited in time and will resolve, such as the lack of wood and waste paper.
As a result, the supply chains should normalize from the second quarter, which is what the vast majority of companies assume, and the infection situation should relax overall, then German industry, with its order books still full, should drive the expected recovery of the German economy.
Because global demand remains high, and that’s the only reason why delivery problems arise. In this respect, many orders, sales and profits that were actually planned for the current financial year will be postponed to 2022. And that is why the prospects for most companies and sectors have improved due to the enormous backlog in the industry.
Favorable environment for increasing investments
The good prospects for most industries for the new year can also be explained by the global investment cycle, which is starting again, and improved export expectations.
Even before the outbreak of the pandemic, corporate investments lagged far behind and spending on machinery and other equipment was on the low side. In order to achieve the long-term trend again, about ten percent are missing in Germany.
Half of the associations surveyed by the IW expect higher investments in their area in 2022 compared to the previous year, including sectors such as the construction industry, which suffered less or not at all during the pandemic. “In many industries, high and increasing investments are pending when it comes to new business processes, climate neutrality, structural change and digital transformation,” says IW boss Hüther.
The investment climate is brightening, especially within the service sector. There is no association here that sees declining investments for its companies.
“I expect strong growth in corporate investments as soon as the uncertainty associated with the pandemic subsides over the long term,” says chief investment strategist Stephan.
The framework conditions for this are favorable despite the lack of material: Thanks to the high demand, the production capacities are fully utilized, “and the financial conditions could hardly be better in view of the low interest rates and high liquidity reserves of the companies,” says Stephan.
This is confirmed by record-high cash holdings: With 688 billion euros, German companies hoarded more liquidity than ever before in November. But: The money is melting away, because it is interest on the bank accounts taking into account the inflation with an average of minus 4.6 percent. This is shown by data from the international law firm Freshfields, which is available to the Handelsblatt. It is based on Bundesbank statistics on the deposits of around 1.3 million companies.
Extensive government infrastructure programs, including the climate-neutral restructuring of the economy, also provide growth impetus. German mechanical engineering companies in particular are likely to be among the winners of a global investment boom due to their high export share of 80 percent.
According to the analysis of the IW, the motives for investments are nevertheless very different: On the one hand, there are areas that are optimistic because of the poor starting position. This applies to many services such as hospitality and tourism. In other words, areas that were hardest hit by the standstill during the pandemic.
In industry, on the other hand, investments are already high at many companies, so that a number of sectors such as chemicals and pharmaceuticals “only” expect stagnation. However, that does not mean a weakness, but often further expenditures at record highs, especially with the car manufacturers who have to cope with the conversion to electromobility.
The shortage of skilled workers remains the greatest challenge
In view of rising expectations for production and investment, 21 of the 48 associations surveyed expect an increase in employment. This includes many industrial sectors such as the pharmaceutical, metal and electrical industries. The service sector wants to hire additional employees in the areas of freight forwarding, investment and leasing, information and advertising in the coming year.
In the construction industry and in the trades, companies are desperately looking for staff anyway. This also applies to Germany’s machine builders. They are particularly hard hit by the shortage of skilled workers.
The majority of the 356 HR managers surveyed in November saw bottlenecks in all employee groups with the exception of auxiliary workers, as the industry association VDMA recently determined. This is particularly true of academics (81 percent) and skilled workers (90 percent). This means that the situation has worsened again, especially among skilled workers, since the survey in June.
Four out of five respondents (82 percent) want to increase the permanent workforce in the next six months and are looking for qualified staff. Finding this sufficient in 2022 and in the years thereafter will not be easy. IW boss Hüther predicts: “If the labor force shrinks from 2025, the problem of skilled labor shortages will arise much more than in 2022.”
More: More cash than ever – companies are caught in the liquidity trap