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Germany’s stuttering engine a major concern for Italy’s export-led economy

by Luca Orlando

“Am I concerned? You bet I am, Germany's economy has slowed down for a few months now, and the German market accounts for a large part of our sales,” said Luigi Carlon, a rubber and plastics entrepreneur from the Veneto region.

For people like Carlon, the biggest business problem is the slump in domestic demand. After that, though, comes Berlin. For Italy’s export-led economy, in fact, Germany is the biggest export market (and, in some cases, a bigger market than Italy itself), with €48.4 billion of total sales last year, over 12% of Italy's total exports.

Germany’s economic slowdown is starting to spread worries around Europe. After disappointing data on orders, even production output has been disappointing in August, as uncertainty over the future of Ukraine is compounded by tepid demand for German products from slow-growth Europe.

In its new World Economic Outlook release on Tuesday, the IMF cut growth estimates not only for Italy but even for Germany (+1.4% for GDP in 2014) and for the whole euro area.

Berlin's reduced pace of growth poses a major threat for Italian companies, since Germany is their main market for exports. Italy is suffering through its third recession in five years, and a weak 2015 would seriously compromise the government’s plans to keep its deficit in check.

Italian sales to Germany were still growing in the first seven months of 2014, but prospects are weak. In some cases, such as for furniture and wine, the figures are already negative.

Overall Berlin counts for about 13% of Italian exports but in some areas, such as rubber-plastic products, the share goes up to 19% and over.

Italy is the fifth importer by value to the €900 billion German market, which has, however, slowed down in the past few years. After a 13% jump in 2011 and a meager 0.4% increase the following year, German imports have declined last year by 1%, and a modest rebound in the first half of 2014 could now be stifled by the past few months' weak trend, with a fractional drop in May and a 1.5% growth in June and July.

The problem goes beyond mere statistics, since an extra percentage point of exports to Germany is worth half a billion euros in extra revenues for Italian manufacturing (while a 1% change in exports to China has a much smaller impact).

For Italy's manufacturing sector, the Germany was one of the few driving forces for Italian exports in 2014.

Between January and July, in fact, Germans kept buying Italian products, with sales up 4.5%, or €1.3 billion, four times more than a weak global trend, which fell in several areas, including Russia, Ukraine, India, Japan, the Middle East and Turkey.

This year, Germany makes up for 13% of Italy's exports, over €30 billion between January and July, compared with €235 billion total sales. Some industrial sectors, however, are most exposed, such as the rubber and plastics sector, with companies like Carlon's Index, whose exports to Germany make up for 19.1% of total exports.

The base metals and food sectors follow.

To be sure, in manufacturing sectors such as beverages, furniture and wood products, the negative impact of slowing exports is still limited, while in other sectors exports show an uptrend. Sometimes the increase is double-digit, such as in the pharmaceutical sector, of in the tile sector (up 15.9%), or in the steel industry (up 11.9%).

“For now, we aren't suffering a slowdown, and public construction still helps supporting sales, with half a billion euros revenues. The picture still remains positive, let's hope it stays this way,” said Giuseppe Pasini di Feralpi, owner of a steel plant in Germany which supplies the construction business.

Sectors focusing on the domestic market, such as food, clothing, and furniture, face a bigger risk.

“Sadly, we expected this drop, because German domestic demand begins to falter, and, on the other hand, the situation in Russia is starting to weigh on them, too,” said Roberto Snaidero, president of Federlegno Arredo, the Italian Federation of Wood, Cork, Furniture and Furnishing Industries.

Car makers and the machinery and electronics sector, on the other hand, continue to benefit from a limited slowdown in domestic demand.

“For us, the German market is worth €40 million in sales, and this year's revenues are up 20%,” said Marco Bonometti, president of Lombard car parts manufacturer Omr.

The company's results are boosted by demand for the new Mercedes, Volkswagen, Bmw and Audi models, as is the case for several Italian car parts producers.

“We continue to grow in Germany, because several of our components are part of their products. However, we are concerned about the situation, especially with respect to what's going on in Russia, a country that Germany is very exposed to, both in terms of exports and of direct production,” said Pierangelo Decisi, president of Piedmont firm Sigit.