Atradius Country ReportGermany – April 2012

Berlin

Munich

Cologne

Frankfurt

Hamburg

EssenHannover

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Summary

Main economic developments

German GDP growth is forecast to slow down in 2012 Domestic demand will be the main driver of economic growth German exporters have outperformed forecasts in early 2012 The German economy remains susceptible to downside risks

Insolvency environment

We estimate that corporate insolvencies will increase 5 % in 2012 and level off in 2013.

Main economic developments

Economic growth lost pace in late 2011 as exports weakened

In the last quarter of 2011 Germany’s economic performance lost some momentum, as GDP contracted 0.2 % on the previous quarter. This was triggered to a certain extent by the economic problems in the Eurozone, as demand from some EU main trading partners decreased. The only positive contributions came from investments, particularly in construction, while exports decreased 0.3 %, according to the German Statistics Office. That said, the German economy still recorded strong 3 % economic growth in 2011, after 3.7 % in 2010.

Economic growth of 0.7 % in 2012 and 1.6 % in 2013

The pace of growth is expected to slow down this year, as global demand weakens and the debt crisis in some Eu-rozone countries persist. However, robust domestic demand will support the German economy. In March 2012 IHS Global Insight estimated that German GDP will grow 0.7 % in 2012, followed by 1.6 % in 2013 (see chart below).

Source: IHS Global Insight

5

4

3

2

1

0

-1

-2

-3

-4

-5

-62009 2010 2011 2012* 2013*

-5.1

3.6

0.7

1.6

3.0

(% change on previous year)

GDP growth

*forecast

(Index 100 = Neutral)

Consumer confidence

Private consumption sustained by lower unemployment

Private consumption finally picked up in 2011, contributing more significantly to economic performance than in the years before. It is expected to be a main driver of economic growth in 2012 and 2013, as household consumption growth rates will likely remain robust (see chart below).

Source: IHS Global Insight

Consumer spending is helped by an overall decreasing trend in unemployment (7.2 % in March 2012) and increa-sing job creation. The jobless rate is expected to decrease further in 2012 and 2013, to 6.8 % and 6.6 %, respec-tively. Rising wages also help to fuel improvements in domestic demand. After a decrease in H2 of 2011 consumer confidence has picked up again in Q1 2012.

Source: ICON; IHS Global Insight

Rising consumer prices in the last few months have dampened consumer demand somewhat, as inflation increa-sed to 2.3 % year-on-year in February 2012, following a 2.1 % rise in January. The main drivers were again energy costs (oil, fuel and electricity), which increased 7.6 % year-on-year, and motor fuel prices (up 8.9 %). However it is expected that consumer prices will decrease again in the coming months, leading to rising purchasing power of households. After 2.3 % in 2011 IHS Global Insight expects inflation to decrease to 1.9 % in 2012 and 1.5 % in 2013.

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*forecast

3.0

2.5

2.0

1.5

1.0

0.5

0

-0.5

-1.0

-1.5

-2.0

-2.5

-3.0

2009 2010 2011 2012* 2013*

0.1 0.6

1.31.51.4

(% change on previous year)

Private consumption

(Manifacturing industry index)

Business confidence

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Industrial production growth to slow in 2012

Industrial production is expected to increase 0.9 % year-on-year in 2012 (see chart below). However, one has to bear in mind that production increases have been rather high in 2010 (10 %) and 2011 (8 %). After a weak Decem-ber 2011 (-2.6 %) industrial production increased again in January 2012, by 1.6 %.

Source: IHS Global Insight

After a decrease in H2 of 2011 business confidence in the manufacturing sector has picked up again since the end of the year (see chart below).

Source: OECD (MEI); IHS Global Insight

Will export performance really decrease as much as expected?

According to the German Statistics Office exports and imports increased 11.4 % and 13.2 % respectively in 2011, and the trade balance surplus rose to Euro 158.1 billion. While Germany’s exports to Eurozone neighbours rose 8.4 %, those to the US increased 12.4 %, to China 20.4 % and to Russia a massive 30.6 %: more than to any other destination. As in 2010 Germany has profited largely from the surging demand from emerging markets for its spe-cialised goods: industrial machinery, cars, electronics and consumer goods. This export boom has benefited those sectors that had suffered an immense slump during the global credit crisis, such as automotive and metals.

The boom started to slow down in Q4 of 2011, when exports increased only 5.6 % year-on-year. Shipments to Eurozone countries even recorded a slowdown of growth to 1.1 % in the same period. Despite forecasts of a sharp slowdown in 2012, to date, exports have shown some resilience with robust year-on-year growth rates in January

20

15

10

5

0

-5

-10

-15

-202009 2010 2011 2012* 2013*

-15.5

10.0

0.93.9

8.0

(% change on previous year)

Industrial production

*forecast

(Government debt and budget balance in percent of GDP)

Public dept and budget balance: Germany

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(+9.3 %) and February 2012 (+8.6 %), as demand from non-EU markets like the US and emerging Asian markets compensated for lower exports to the Eurozone. For 2012 the Federation of German Wholesale, Foreign Trade and Services (BGA) expects exports to increase 6 % year-on-year, and imports to rise 7 %.

Continued surge in investments

Beside Germany’s outstanding export performance, investments in machinery and equipment contributed very strongly to the economic rebound in 2010 and 2011. This is expected to slow in 2012, but to rebound again in 2013 (see chart below)

Source: Consensus Forecasts (Survey date March 12, 2012)

Reduction of the budget deficit is underway

As a consequence of the credit crisis and stimulus measures, government debt increased sharply to 74.4 % of GDP in 2009 and rose further in 2010, to 83.2 % of GDP. After a budget deficit increase to 4.3 % of GDP in 2010, the Federal Government has reduced the deficit to 1.0 % of GDP in 2011. The improved budget balance is largely the result of higher tax revenues and lower government transfer payments for unemployment and short-time working benefits. Germany intends to reduce the government debt over the coming years (see chart below).

Sources: Bundesbank; IHS Global Insight

15

10

5

0

-5

-10

-15

-20

-25

-30

2009 2010 2011 2012* 2013*

-22.8

10.5

1.74.0

7.6

(% change on previous year)

Machinery & Equipment investments

*forecast

Downside risks remain

The German economy has proved to be exceptionally resilient. However, even if growth is increasingly driven by domestic demand, the economy is still highly dependent on the performance of Germany’s main trading partners. Therefore further escalation of the Euro debt crisis, stagnation of the (rather fragile) US recovery and a sharp slow-down in Chinese growth remain downside risks which would immediately affect Germany’s economy and businesses. Rising inflation fuelled by persistently higher energy prices would hurt consumers´ sentiment and adversely affec-ting domestic demand.

The insolvency environment

Corporate insolvencies expected to increase 5 % in 2012 and level off in 2013

Germany’s surprisingly good economic performance in 2010 and 2011 led to fewer business failures. According to the German Statistics Office, the number of corporate insolvencies decreased 5.9% year-on-year - to 30,099 cases - after a 2.1 % decrease in 2009. Even the relatively high 2009 increase was still much lower than the sharp rise seen in some other European countries such as the Netherlands (73.5%), Spain (50.0 %), Italy (28.6 %), the United Kingdom (22.8 %), Switzerland (23.5 %), and France (19.6 % in 2008).

The default environment has remained relatively benign so far, but we nevertheless expect that due to decreasing economic growth the insolvency situation will deteriorate somewhat in 2012 (see chart below).

Sources: National Statistics Office; Atradius Economic Research

Note: Forecasts are based on the outcome of statistical models and expert opinion. The history of growth rates in the table represent estimates based on official insolvency statistics and model-based calculations. As such they should be treated as indicative. All views expressed here are those of Atradius Economic Research (date of final forecast: 10 February 2012)

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0 0

% change

2007

-14.6 %

2008

0.4 %

2009

11.6 %

2010

-2.1 %

2011

-5.9 %

2012*

5.0 %

German business insolvencies

20,000 20,000

35,000 35,000

25,000 25,000

40,000 40,000

15,000 15,000

30,000 30,000

10,000 10,000

5,000 5,000

*forecast

31,998

2013*

0 %

31,60030,099

31,600

29,160 29,291

32,687

0,0

0,5

1,0

1,5

2,0

2,5

3,0

0,0

0,5

1,0

1,5

2,0

2,5

3,0

2005 2006 2007 2008 2009 2010 2011 2012

Perc

ent

Median EDF evolution by country

United Kingdom

Spain

Germany

Italy

France

Expected default frequency for German listed companies affected by Eurozone debt crisis

Until mid-2011 the median Expected Default Frequency (EDF) for German listed companies continued its mode-rating trend, albeit at a slower rate than in 2010. However, since July 2011 the Eurozone debt crisis has led to a deterioration of German EDF levels, although to a much lesser extend than in other large Eurozone economies (see chart below). In early 2012 the German EDF improved again, with the February 2012 figure (41 basis points) being 10 basis points lower than in December 2011.

Source: KMV Credit Monitor and Atradius Economic Research

*The Expected Default Frequency (EDF) chart above is based on listed companies in the markets referred to, and the likelihood of default across all sectors within the next year. In this context, default is defined as a failure to make a scheduled payment, or the initiation of bankruptcy proceedings. Probability of default is calculated from three factors: market value of a company’s assets, its volatility and its current capital structure. As a guide, the probability of one firm in a hundred defaulting on payment is shown as 1 %.

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Median EDF evolution by country*

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