Germany steels itself to face recession threat

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German steelworker at ThyssenKrupp works in Duisburg
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Germany, Europe’s biggest economy, could be heading for a recession.

Data from the German statistics office on Wednesday showed the economy shrank by 0.1% between April and June.

That takes the annual growth rate down to 0.4%. Germany narrowly avoided a recession last year.

But this time, there are predictions the economy will continue to contract for another three-month period.

The main driver of the economic weakness appears to be rising global trade tensions.

Marcel Fratzscher, the president of the research institute DIW Berlin, told the BBC that he believes Germany’s first recession since 2013 is probably already under way.

“Most likely we will see another quarter of negative growth, and that’s by definition a technical recession,” he says.

He forecast the economy to shrink by 0.1% between July and September.

“It’s very mild, but also at the same time, not a very strong performance,” he said.

germany gdp

Exports slowing

Germany has traditionally relied on selling its manufactured products, such as cars, abroad.

That is a strength in good times, but appears to be a drag during the current trade tensions.

Data last week suggested that momentum in Germany’s exports slowed in the first half of the year and reversed in June.

Other figures showed there had been a 1.5% fall in industrial output in May.

Volkswagen cars for export wait for shipping at the port in Emden, Germany
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Germany is sending fewer cars abroad

“Industrial production is suffering from a severe setback of less global demand and increasing international trade problems,” says Klaus Deutsch, the head of economic and industrial policy at the BDI, a business lobby organisation with one million members.

It predicts a recession may not happen this year, but would be hard to avoid next year if the current global turmoil continues.

Companies that supply Germany’s carmakers, including Continental and Bosch, have warned about the impact of the worldwide slowdown on sales of cars.

“Most companies don’t yet have to lay off workers or make drastic changes, but the mood has been softening strongly, and if things continue deteriorating, many companies will have to cut back production, perhaps move to temporary work schemes and reduce output even further,” Mr Deutsch told the BBC.

Trump tariffs

The current situation has the potential to get much worse for German carmakers.

The US has threatened to impose extra tariffs on European-made cars, something that would hit the likes of BMW and Mercedes-Benz particularly hard.

US President Donald Trump recently joked about the potential for tariffs at a media event at the White House.

But many in Germany don’t see the funny side, particularly as US national security has been cited as part of the justification for any new border taxes.

Chancellor Angela Merkel has said the threat to designate European carmakers as a security threat came as “a bit of a shock”.

But her government believes the German economy will grow slightly this year, and does not think further stimulus is necessary.

And economy Minister Peter Altmaier had said the country was not yet in a recession and could avoid one if it took the right measures.

cars
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Some Germany-based economists have said they expect the country to escape a recession this year, pointing to the near-record low unemployment rate and strength of domestic-focused businesses.

But with a potential recession looming, the government has been called on to spend its way back to growth.

The German government had a fiscal surplus of €58bn (£53.6bn) in 2018, so it has plenty of cash to spend, should it choose.

“It makes sense for the government to spend more,” says DIW Berlin’s Mr Fratzscher.

“It needs to act now in order to prevent a deeper recession or protracted slowdown in the economy, rather than wait for that to happen,” he says.

The BDI business lobby organisation wants new tax incentives and investments in climate change mitigation measures and new digital technologies.

On Tuesday, Chancellor Merkel said she did not see any need for a fiscal stimulus package to counter the effects of a slowing economy, but said Berlin would continue to pursue high levels of public investment.

Shareholders of Union Bank of Nigeria (UBN) Plc have approved a proposal to cancel N54.46 billion accumulated permanent losses in the books of the commercial bank.

At the extra-ordinary general meeting in Lagos, shareholders authorised the board of directors to reduce the bank’s share premium account by N54.46 billion to net off the legacy deficit, thus removing the main drawback that had disallowed the commercial bank from paying dividends from its net profit.

According to the resolution, subject to court’s confirmation, the bank’s issued share capital, including for this purpose its share premium account, be reduced by the sum of N54.458 billion, which has been lost or is otherwise unrepresented by available assets and that the credit arising from the reduction be used to eliminate the retained loss in the company’s audited financial statements as at December 31, 2018.

The bank stated that a review of its financial position as at December 31, 2018 established a deficit of N54.46 billion as accumulated permanent losses from legacy transactions, in addition to the N247.87 billion, which had been approved by shareholders in 2017.

The bank explained that the proposed balance sheet restructuring will not affect its authorised or issued share capital or regulatory capital, but should result in a reduction of the credit balance in the bank’s share premium account, while leaving the aggregate shareholders’ funds unchanged.

“It would have no impact on the bank’s creditors, but rather pave the way for the bank’s investors to receive dividends out of the bank’s future profits,” UBN stated.

The board of directors had proposed a reduction of N54.46 billion from the bank’s share premium account of N187.09 billion, pursuant to sections 106 and 107 of Companies and Allied Matters Act (CAMA). The reserve arising from the reduction of capital would be used to eliminate the negative retained earnings as at December 31, 2018.

UBN grew its net profit by 39 per cent to N18.1 billion in 2018, but the bank could not declare dividend due to extant rules that disallow companies with retained deficit from dividend payment. Key extracts of the audited report and accounts of Union Bank for the year ended December 31, 2018 showed that gross earnings dropped by 11 per cent from N163.8 billion in 2017 to N145.5 billion in 2018. Net interest income declined by 17 per cent from N66.7 billion to N55.4 billion while non-interest income also dropped from N39.3 billion to N35.2 billion.

With 113 per cent reduction in credit impairment, net income after impairments increased by 16 per cent from N80.64 billion to N93.5 billion. Profit before tax thus increased by 33 per cent from N13.9 billion to N18.5 billion. Profit after tax also rose from N13 billion to N18.1 billion. Earnings per share, however, declined by 11 per cent from 72 kobo in 2017 to 61 kobo in 2018.

Union Bank of Nigeria Chairman, Mr. Cyril Odu, said the bank was focused on delivering value to its stakeholders. “Union Bank is on course towards delivering its 2019-2021 strategic objectives. As we continue our push towards being Nigeria’s most reliable and trusted banking partner, we remain focused on improving the profitability of our business and delivering value to all our stakeholders – shareholders, customers, business partners and employees,” Odu said.

According to him, following the successful execution of the bank’s debut local currency bond issue to raise N13.5 billion and the tightening up of its loan portfolio, Union Bank remains well positioned to continue executing key business priorities in 2019 and beyond.

Heathrow says next week’s strikes postponed

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Plane flying over Heathrow sign
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Heathrow says strike action scheduled for 23 and 24 August has been postponed.

A spokesperson for the airport said the decision had been made to allow union members time to consider its revised pay offer.

The Unite union had warned of “summer travel chaos”, with walkouts scheduled on a number of days during the peak season.

Unite said a ballot over the new offer for 4,000 airport staff was under way.

That ballot will close on Monday 2 September. “Strike action proposed for 23 and 24 August has been suspended to allow the ballot to take place,” a spokesperson said.

Earlier this month, airlines cancelled flights in preparation for strikes by security, airside operations and passenger services personnel at the airport’s five terminals.

Heathrow had initially cancelled 177 flights when the two-day strike action for 4 and 5 August was announced.

The action was then postponed just hours before the walkout was due while talks took place at the conciliation service Acas.

The airport has increased its pay offer from 7.3% to 7.8% over two years.

A Heathrow spokespersons said: “We have put an additional £2.5m on the table since talks began, with our current offer bringing the total pay rise to 7.8% over two years for all frontline colleagues.

“This is well above [Retail Prices Index inflation], higher than any other UK airport and helps to provide long-term wage certainty and job security.

“Heathrow has a duty to ensure the business is sustainable – particularly against the backdrop of increasing economic uncertainty facing the UK in the immediate future. The pay offer we have put on the table achieves that, in addition to being rewarding and fair to all colleagues.”