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Unnerving Berlin

Germany's lower growth hits companies

Image source: Africa Studio, Valentyn Volkov - Shutterstock

What's going on?

An influential German research group cut its forecast for the country’s 2019 economic growth from 1.1% to 0.6% on Thursday. And judging by two major German companies simultaneously reporting earnings, it’s not wrong…

What does this mean?

Germany’s Lufthansa, Europe’s largest airline, disclosed descending profit last quarter. It fell 11%, thanks to a fare-war headwind – and investors sent Lufthansa’s stock down 6% on Thursday. The airline also announced a cautious forecast for 2019 as it struggles with higher fuel prices (costing it an estimated $735 million extra this year) and losses at its Eurowings budget carrier.

RWE, meanwhile – Germany’s largest electricity producer – reported 2018 annual profit that short-circuited and fell 29%, thanks to lower electricity prices in the country. RWE also said further declines this year are likely – one major reason being the shrinking profitability at its “conventional” power plants.

Why should I care?

For markets: The best offense is a good defense.

Despite its fizzling profit, RWE increased the dividend it pays investors on Thursday – and they sent its stock up 2%. The company is in the process of swapping assets with soon-to-be ex-rival E.ON: focusing, respectively, on renewable energy production and power grids should mean less competition and more profit. E.ON also increased its dividend on Wednesday, even as its own profit fell. Such “defensive” stocks are in vogue with investors this year: good times or bad, people will always need power – and the utility companies that provide it have reasonably stable cash flows.

The bigger picture: Germany is no help to the eurozone.

A sizable chunk of Germany’s economy is driven by selling goods overseas. With the country’s giant autos sector suffering – partly from the US-China trade war – and the global economy losing steam, things aren’t looking so bright in 2019. As the eurozone’s biggest economy, weakness in Germany begets weakness overall: last week, the European Central Bank lowered its eurozone growth forecast for 2019 and announced additional support for banks in its 19 countries.

Originally posted as part of the Finimize daily email.

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