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Germany: the euro

Germany: the euro zone’s growth engine NEWS AND MARKETS Despite all the geo-political volatilities, like the Brexit, US election, China losing its economic momentum and the refugee crisis in Europe; Germany has still managed to keep its economic growth engine right on track. For German economy, 2016 ended on a positive note. The strong economic activity in the last quarter of 2016 accelerated the annual GDP more than any analysts could have predicted. The annual GDP rose to 1.9 % in 2016, beating a 1.8 % estimate. This growth is mainly attributed to stronger private and government consumption. Private and household consumption benefited from a drop in the unemployment rate, which is now at the lowest level since the country’s reunification more than a quarter of a century ago. At the same time, government spending was boosted by costs related to the provision, assistance and shelter for more than 1 million refugees. Exports grew by 2.5 %, with imports also registering a growth of more than 3 %. Adding to the positive storyline, the German government achieved a record fiscal surplus of € 24 billion (0.8 % of GDP) in 2016 for the 3rd consecutive year, despite the high added cost of the refugee crisis. The positive trends witnessed in 2016 could also be seen in the first quarter of 2017. German manufacturing PMI (purchasing managers’ index) stood at 56.4 in Jan and 56.8 in Feb 2017. This was slightly below the preliminary estimates of 57.0. This index reflects the manufacturing activity, new orders, export orders, and employment numbers. A score above 50 indicates expansion in the sector. Some leading economists have raised the forecast for German GDP and now expect the economy to expand 1.6 % in 2017 instead of the 1.3 %. Forecasts for engineering sector: Steady export growth expected For more than 50 years, industrial exports have been the backbone of Germany’s constant rise on the world stage. Automobiles, industrial machinery, electrical machinery and precision machines are responsible for nearly 50 % of its export revenues. The U.S., China and major EU economies have been Germany’s top export partners for a long time. Economists at the German Mechanical Engineering Federation ‘VDMA’ see good reasons to anticipate positive development, albeit moderate and weighed down with risks of setbacks due to political uncertainty in US and Brexit. Author: Sushen Doshi, International Correspondent for World of Industries – Industrial Automation In 2015, export revenue as a percentage of total revenue reached 49.7 % in the manufacturing sector. Since exports represent such a large share of German industrial revenue, let’s take a look at the mechanical and electrical engineering sectors, which represent the majority of Germany’s exports. Mechanical and electrical engineering: Germany’s mechanical engineering industry with an export ratio of 62.5 % relies heavily on domestic production. In 2015, total German mechanical engineering exports rose by 1.7 %. Exports to China have started to show decline in the last 2 years mainly due to a slowdown in capital investment and growing competition from local suppliers. However, exports to the USA are rising with some sectors recording double-digit growth. German mechanical engineering should receive a slight boost from the sluggish but relatively stable economic recovery in western Europe, as well as the robust economic climate in eastern Europe (excluding Russia). In the electrical engineering sector which includes computer, electronics, optical products and electrical equipment, total exports rose by 6 % in 2015. The demand for computer, electronic and optical products is expected to be stronger in western Europe as compared to the demand for electrical machinery. In China, even though the mechanical sector was struggling to gain some traction, the electrical engineering products are seeing a decent rise in demand. In the coming years, Poland is set to become one of the three most important drivers of macroeconomic demand. Exports to Poland, the Czech Republic and Hungary together accounted for over 11 % of total exports by the German electrical engineering industry in 2015. In the last few years, China is losing momentum and uncertainties in other major markets are set to make German exports vulnerable. Therefore, in order to maintain high volumes and growth rates, Germany needs to increase its focus on exports to countries like India, Saudi Arabia, Iran, Vietnam and Indonesia. Germany’s trade surplus Steady economic growth and low unemployment led the German government to record a total surplus of € 23.7 billion (0.8 % of GDP). In absolute terms, this was the highest surplus achieved by the government since German reunification. Recently, Germany was fiercely criticized over its massive trade surplus from Eurozone politicians and Trump’s administration in the US, who are blaming Germany’s export policy and the Euro for the economic imbalance. Critics believe that Germany’s trade balance can be systematically manipulated with the exchange rate. But with today’s integrated global value chains, even industrial exports now consist many imported inputs, which means, the effect of exchange-rate fluctua- WORLD OF INDUSTRIES – INDUSTRIAL AUTOMATION 2/2017

tions on prices and the trade balance is no more a dominant factor. Germany owes its export success to its strong market position, competitiveness through innovation and the pricing power of its highly specialized manufacturing champions. Even Prior to adopting the common currency, these were the central features of Germany’s Wirtschaftswunder (“economic miracle”). Germany’s trade surplus reflects the competitiveness of its exports but at the same time it also shows the lack of imports and government spending and investments. It has one of the lowest public-investment rates in the industrialized world. Germany should improve its digital and transportation infrastructure; strengthen market mechanisms to encourage more renewable-energy development; address its shortage of skilled labor; change its taxation policy provide incentives to invest; and reform its regulations to reduce uncertainty. With a general election coming up in September, Chancellor Merkel might be under pressure to debate more on the issue of trade surplus or increase public spending, as voices in Germany rise for fiscal loosening. But in a country where voters view fiscal prudence favorably, it is unlikely to see a major turnaround. Industry 4.0: opening new avenues In the words of German Chancellor Mrs. Merkel “Industry 4.0 is the comprehensive transformation of the whole sphere of industrial production through merging of digital technology and the internet with conventional industry.” In short, everything in and around a manufacturing operation including the production process, the factory, the suppliers and distributors, even the product itself is digitally connected, providing a highly integrated value chain. Industry 4.0 depends on a number of new and innovative technological developments: n The application of information and communication technology (ICT) to digitize information and integrate systems at all stages of production n Cyber-physical systems that use ICTs to control physical processes and systems involving embedded sensors and intelligent robots n Network communications including wireless and internet technologies that serve to link machines, devices, work products, systems and people, both within the manufacturing and with suppliers and distributors n Simulation, modeling and virtualization during product design and the establishment of manufacturing processes; n Collection of vast quantities of data, and their analysis, immediately on the factory floor or through big data analysis and cloud computing; and intelligent tools of predictive maintenance. In all these sectors, be it ICT, Cyber-physical systems, Network communications or Simulations, German companies already have immense technical expertise, which makes Germany and its companies not just relevant but in fact market leaders right from the start. Industry 4.0 is expected to have a major effect on global economies. A report from the European Commission says industry 4.0 can deliver estimated annual efficiency gains in manufacturing of between 6 % and 8 %. The Boston Consulting Group predicts that in Germany alone, Industry 4.0 will contribute 1 % per year to GDP over the next ten years, creating up to 400,000 jobs. Historically, technological revolutions have created new jobs and the requirement for different kinds of roles. The nature of manufacturing work has been shifting from largely manual labor to programming and control of high performance machines. As in the past, some jobs will evolve, some will be eliminated, and others will be created. Workers who are able to make the transition to Industry 4.0 may find greater autonomy and more interesting or less arduous work. Employers need personnel with creativity and decisionmaking skills as well as technical and ICT expertise. By 2020, labor markets in the EU could be short of more than 800,000 professionals; this shortage may be even more pronounced in advanced manufacturing settings where big data analysts and cyber security experts are required. Photograph: Lead Fotolia z ‘An application of Industry 4.0’ The Siemens electronics plant in Amberg (Germany) produces customized PLCs in a state-of-the-art ‘smart factory’ where product management, manufacturing and automation systems are integrated. Intelligent machines coordinate the production and distribution of 950 products with more than 50,000 different variants, for which roughly 10,000 materials are sourced from 250 suppliers. By linking intelligent machines with data-rich components and workers, innovation cycles can be shortened, productivity raised and quality improved: the Amberg plant now records only 12 defects per million (versus 500 in 1989) and has a 99 % reliability rate. WORLD OF INDUSTRIES – INDUSTRIAL AUTOMATION 2/2017 Turkish-Machinery.indd 1 17.03.2017 14:59:23