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EU's top economy is in trouble Bloomberg
10 Feb 2024

Roughly 15% of German companies are reportedly in distress, the largest number in the bloc

The German economy is in for a difficult year after contracting in the final quarter of 2023, as inflation and high interest rates continue to weigh on the industry, Bloomberg reported this week, citing analysts.

According to the Federal Statistical Office (Destatis), Germany's economy stagnated in October-December 2023, with GDP falling by 0.3%. While inflation eased in January to 3.1%, it stays persistently higher than the target 2% rate. The surge in consumer prices over the past months has led to a jump in interest rates, which exposed problems in the manufacturing and property sectors. According to consulting firm Alvarez & Marsal, around 15% of companies in Germany are currently in distress, which is the highest rate in Europe.

"Germany is really in trouble... All the big manufacturing economies are slowing but, in Germany, this is compounded by higher energy costs. There are also challenges in the auto sector with competition coming from China," Brian Mangwiro, a fund manager at UK's Barings Bank, told Bloomberg.

The news outlet notes that early surveys for 2024 signal there's little hope that economic struggles will end in the foreseeable future.

"Germany emerges as the most distressed market in Europe... The country's economic outlook remains bleak, with both its government and the European Commission projecting a 0.4% contraction in its economy for 2024 due to high inflation, elevated energy prices and sluggish international trade," according to the Weil European Distress Index, which cited deteriorating investments, liquidity pressures, and stagnant profitability as the country's major economic problems at the moment.

Analysts note that problems in the real estate sector and the lack of economic growth will likely pose problems for German banks. About a third of commercial real estate loans face higher borrowing costs over three years, which could lead to credit defaults and impairments, according to a recent report from the country's central bank.

Overall, many market players look to rate cuts, Bloomberg said.

"In the context of still macro-challenged companies, it's a sliver of light at the back of the horizon. Until lower rates translate into a tangible increase in the availability of capital market solutions we will continue to see stress," Alvarez & Marsal predicted.

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