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issue: January 2009 APPLIANCE Magazine

Expanded Web Coverage: Europe: Hoping for a Soft Landing

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by Diane Ritchey, News Editor

 After holding up well in early 2008, growth slowed markedly in Europe the rest of the year. The spread of the crisis in financial markets has significantly dampened the outlook for the European economy for 2009.

Western Europe’s Struggles

 According to London-based research market firm Euromonitor, Western Europe’s economic growth predictions for 2009 are grim.

The United Kingdom is expected to be the worst-affected country in Western Europe, with its economy predicted to contract by 1.3% against a Eurozone average contraction of 0.5%. National statistics in November 2008 indicated that the UK economy shrank by -0.5% quarter-on-quarter in 3Q 2008.

Germany is already in recession, according to national statistics released in November 2008, which showed that the economy shrank by a quarterly 0.5% in 3Q 2008 following a contraction of 0.4% in the second quarter. In contrast, national statistics released by France in November 2008 indicated that the economy grew by 0.1% quarter-on-quarter in 3Q 2008. Nevertheless, the economy is expected to shrink by 0.5% in 2009, according to the International Monetary Fund (IMF).

Italy and Spain are projected to contract to -0.2% GDP in 2009. Russia’s economy should continue to expand at a solid pace of 5.5% in 2009. Turkey’s 2009 GDP is projected at 3.0%, while Portugal’s GDP is projected at 0.1%.

Unemployment is projected to be higher than expected in 2009. A number of major companies in Western Europe announced significant job cuts in October and November 2008, and job losses are already having a negative impact on retail sales and consumer spending, and this is set to continue or worsen in 2009, Euromonitor says.

Consumer confidence in many countries is deteriorating due to insecurity over job losses and the general economic gloom. Many retailers in the UK, for example, took unprecedented measures to boost consumer spending with pre-Christmas sales in November 2008.

Overall consumer confidence in EU-27 countries stood at -18.6 in September 2008, compared to -9.9 in January 2008, according to Eurostat, with a zero value indicating that confidence was neither positive nor negative. One of the fastest-dropping indicators was the UK, where confidence fell from -8.8 in February 2008 to -22.6 in September 2008.

In addition, the international business environment has, in general, been affected due to slowing investment, a shortage of credit, and a downturn in international demand for most goods and services.

The good news: inflation is predicted to be much lower than had previously been thought. The IMF projects that inflation in advanced economies in 2009 will be 1.4% compared to 2.0% predicted in October 2008, while in developing economies inflation is set to be 7.1% compared to 7.8% under earlier forecasts.
The IMF noted, however, that extremely steep falls in commodity prices have persisted, especially in oil, but also in other materials such as steel, due to falling global consumption and demand. This is easing the situation for consumers, IMF says, but is cutting earnings for companies and countries operating in the commodity sectors. In general, developed countries with reliance on imported commodities will benefit while many developing countries, which rely on commodity production and exports, may lose out, the firm says.
For consumers, IMF says that lower inflation is generally positive as the costs of most goods and services should increase less quickly than expected, making less of an impact on disposable incomes. It also makes it theoretically cheaper to borrow money, IMF says—for instance, for mortgages or personal loans—although the credit and banking crisis has meant that the availability of credit is still limited in most developed markets.

Interest rates are expected by the IMF to be lower than under previous forecasts, with the U.S. dollar London interbank offered rate (LIBOR) projected to be 2.0% in 2009 compared to 3.1% expected in October 2008 forecasts.

However, the overall pace of growth will weaken in 2009. A number of large European banks are now known to be embroiled to a substantial degree in the U.S. sub-prime mortgage problem. The European Central Bank has loosened policy significantly, but domestic demand is still expected to weaken. Investment, however, is still strong and should maintain its momentum in 2009.

Eastern Europe’s Troubles

In late 2008, a recession in Western Europe was viewed as a potential boon to overheated Eastern Europe economies. Inflation, running at 15% in Russia and Latvia, seemed to be the greatest threat. However, as the full impact of the global crisis unfolded, the alleged ability of Eastern Europe to weather the storm relatively better than its Western counterparts has been thrown into question.

According to the IMF, all the economies of the eastern European region are highly dependent on credit from the international markets. IMF has estimated total private capital and credit flows into eastern Europe, the former USSR and Turkey, are likely to fall from nearly $400 billion in 2007 to an estimated $262 billion in 2009, a figure which may fall even further as it is based on optimistic forecasts of the effectiveness of the international governmental bailouts of the banks.

In a Reuters report, Erik Berglof, chief economist of the European Bank for Reconstruction and Development, stated that the eastern European countries, “could deal with rising borrowing costs and an economic slowdown coming from the U.S. and Western Europe, but a complete shutdown of international borrowing—nobody can withstand that.”

The IMF forecasts a fall in the growth rate for GDP for central and southeast Europe from 5% in 2008 to 3.5% in 2009. For Russia and the former Soviet Union, it predicts growth of around 7% for 2008 and 5.5% for 2009.

Yet, says IMF, the figures fail to show the full impact of the economic crisis on countries whose economies are heavily dependent on exports to the wealthier western EU. “The impact of a recession in France, Germany, and Britain will be acutely painful to the eastern economies of Europe,” IMF says. “The Czech Republic, for example, relies on exports to the wealthier euro currency zone for 40% of its GDP. And as the British magazine, the Economist, stated, “If Germany gets a headache, Eastern Europe gets a migraine.”

Bulgaria and Romania, who joined the EU in 2007, are also in a highly precarious position, the IMF says. Bulgaria already has a national deficit of 21.5% of GDP, and the firm says this figure is likely to rise as Hungary borrows from international lenders such as the European Central Bank and the International Monetary Fund to save its banks, and the government itself, from insolvency.

Poland, Slovakia, and the Czech Republic are widely portrayed as being in a better position than most other states in the region, with less dependence on loans from foreign finance capital. They are, however, highly dependent on direct investment from transnational corporations and sales of manufactured goods and services to Western Europe.

The three countries have become major centers of manufacturing for the EU market, with the Polish and Czech economies booming from the development of plants making appliances, consumer electronics, and other goods for sale to Western Europe.

According to the Organization for Economic Cooperation and Development, the outlook is a bit better. While acknowledging that the situation was precarious, in December, the group said that economic growth in Poland, the Czech Republic, Slovakia, and Hungary, among the European Union’s largest eastern members, will pick up, albeit not be until 2010.   

OECD said that the Czech economy will cool to 2.5% in 2009 year before recovering to a 4.4% pace in 2010. Polish growth will slow to 3% in 2009 and pick up to 3.5% in 2010, while Slovakia will have expansion of 4% next year before it accelerates to 5.6% the year after. The Hungarian economy may slip into recession this year, OECD said, contracting 0.5%, before rebounding with growth of 1% in 2010. The projected recession in Hungary next year will be driven by weakening export demand and slowing investment, which is curbed by higher interest rates and financing difficulties, OECD said.

Poland may be ready to adopt the euro as early as 2011, OECD said. Still, it called for a “sustainable deficit-reduction plan” to help the currency switch. “A structural improvement in the fiscal balance and a permanent reduction in inflation are key hurdles en route to meeting the Maastricht criteria,” the report said.  A risk of a possible outflow of capital from Poland “could put the financing of the large current-account deficit under stress,” OECD said. “This would render the stability of the currency following the required entry into the ERM2 all the more difficult.”

The Baltic economy of Estonia may contract 1.9% in 2008 and 2% in 2009 before growing 2.9% in 2010, the OECD said. “The currency board and the government’s commitment to the balanced budget rule limit macroeconomic policy options to support the recovery,” the report said.  The country’s inflation rate may slow to 5.1% next year and 3.2% in 2010 as the impact of “food and energy prices are passed through,” the OECD said. A risk of “accelerated reversal of capital flow remains,” which may increase pressure on Estonia’s current-account deficit, it said.

The OECD estimates Estonia’s contraction may average 1% this year and 0.2% in 2009. Neighboring Latvia will grow 0.4% in 2008 before shrinking as much as 0.9% in 2009, it said. Lithuania, the biggest of the three Baltic states, will probably grow 3.9% in 2008 and 0.7% in 2009.

Economic Stimulus Plan

One method proposed to fix Europe’s economy came in late November, from the European Commission, which wants EU governments to jointly combat the growing economic slowdown with a €200 billion ($256.22 billion) stimulus plan to boost growth and confidence among consumers and businesses.

In a two-year European Economic Recovery Plan, the EU called on the 27 EU governments to spend more to halt the accelerating economic slowdown. The proposed stimulus plan would represent 1.5% of EU GDP. Around €170 billion would come from national governments and the rest from EU funds and the bloc’s lending arm, the European Investment Bank.

“Exceptional times call for exceptional measures,” said European Commission President Jose Manuel Barroso. “The jobs and well-being of our citizens are at stake. Europe needs to extend to the real economy its unprecedented coordination over financial markets,” he said in a statement. “This Recovery Plan is big and bold, yet strategic and sustainable.”

The EU economic stimulus report said:

•    A rise of €15 billion in regional economic lending by the European Investment Bank is bound to attract private financing.

•    The EU will be “flexible” in judging public spending. It now limits budget deficits in Eurozone nations to 3% of GDP. That ceiling stays, but the European Commission will impose less strict deadlines for governments to return to fall back into line. The euro zone’s sound finances rules “will be applied judiciously,” the report said.

•    Governments must consider extending jobless benefits, cutting VAT and labor taxes and providing guarantees for loan subsidies to offset higher risk premiums.

•    Economic reforms must be enacted across the EU to make European economies more competitive through retraining programs, slashing red tape, and financial aid for research and development projects.

•    Europe “needs to accelerate” the shift to greener economies and step up investments in non-polluting sectors and technologies and invest seriously in better energy distribution networks.

•    Apart from creating a cleaner environment, it said, measures such as slashing greenhouse gas emissions and promoting clean and renewable energy offer “new economic opportunities ... and create jobs.”

Appliance OEMs Cut Forecasts

Due to the economic struggles last year and the ones that they face in 2009, many European appliance makers are being forced to cut annual financial and shipment forecasts.

Gorenje. In December, Slovenian household appliance maker Gorenje said that 2008 group net profit could be below the forecast of €26.5 million (approx. $33.98 million) by one-third due to the global financial crisis. “The negative effect of numerous cancellations of orders in the last weeks and other foreseen negative factors might reach the scope up to one third of the planned net profit in the year 2008,” Gorenje said in a statement. Gorenje had expected 2008 group net profit would rise by 11.8% from €23.7 million last year, while sales were seen steady at €1.3 billion. The company said financing was the major problem for its business partners and the main reason for cancellations, while consumer demand was also falling. It said the first quarter of 2009 is also expected to be “very difficult.”

Groupe SEB. SEB reported a 15% increase in consolidated revenue for the first-half 2008, to €1.417 billion (approx. $2.094 billion). Compared with 2007, the company said that performance was more varied geographically, with a second-quarter slowdown in Western European countries, but a return to growth in the United States and sustained rapid development in emerging markets. Operating margin in the first half increased by nearly 50% to €117 million ($172 million), including a €13 million ($19 million) contribution from recently consolidated Supor.

Indesit. Vittorio Merloni, chairman of appliance maker Indesit, said in late 2008, “We are dealing with an unprecedented international crisis. Yet we remain confident about the company’s future and are ready to take up opportunities for growth. The unfavorable exchange rates and the negative trend in our markets have not compromised our underlying strengths.” Indesit said the last few months of 2008 would be difficult, with the consumer slowdown continuing. It forecast turnover for the year at €3.2 billion ($4.17 billion).

Arçelik. The Turkish white goods producer, which in the last several years has become one of the biggest appliance OEMs in Europe, posted a large fall in 3Q consolidated net profit to 240,000 Turkish lira (approx. $149,400). Profit in the first nine months of 2008 amounted to 135 million lira ($84 million), down from the 173 million lira ($107 million) seen in the same period last year.

“These uncertainties experienced in the market are having a negative impact on the durable goods sector as they are on many other sectors,” the company said in a statement. “The aim is for the negative developments in West European markets to be balanced out by other markets,” it said. It said rising raw materials prices had a negative impact on the profitability of its foreign activities.

Miele. On the bright side, appliance maker Miele reported its highest turnover ever in the 2007/2008 business year, which ended on June 30. The company said that turnover in the period increased 2.5% to €2.81 billion (approx. $3.9 billion) compared with €2.74 billion ($3.8 billion) the previous year. The company said it invested €182 million ($258 million) in the past business year, compared with €177 million ($250 million) in the previous year.

Foreign sales (outside of Germany) grew by almost 5% to €2.04 billion ($2.84 billion), compared with €1.95 billion ($2.76 billion) in the previous year. Consequently, Miele’s foreign turnover share grew from 72% to 73%. The largest percentage growth came from Eastern Europe, where Miele subsidiaries in Russia, the Czech Republic, Poland, the Ukraine, Croatia, Hungary, Slovakia, and Slovenia, reported two-digit growth.

Within Europe, Miele achieved high double-digit sales growth in the north and the south, with strong sales in Turkey, followed by Norway, Finland, Denmark, and Ireland.

Electrolux. In May 2008, Electrolux cut 750 jobs in Italy, or about 9.4% of its work force in that country, and stopped all production at its plant in Scandicci, southwest of Florence. The company said it will concentrate its production of refrigerators in Italy at its factory in Susegana in the northeastern part of the country. It will invest to increase efficiency and productivity at Susegana. Around 450 jobs at the Scandicci plant and about 300 in Susegana will be eliminated.  The company said production capacity for refrigerators has grown rapidly in recent years, with an emphasis on Eastern Europe and parts of Asia.

In the summer of 2008, Electrolux CEO Hans Stråberg said he was in the fourth year of a five-year plan to move more than 50% of the company’s production to lower-cost countries, including Mexico and Thailand by the end of 2009, shaving more than 3 billion kronor of annual costs from 2010. “We have some more factories to close in the program,” Stråberg said. “We’ll see the end of it but we still have some to do.”

In late 2008, Stråberg said that “the financial crisis has without a doubt affected the consumption levels of appliances. Many consumers are postponing their purchases or choosing less expensive products. And there’s no evidence that the weak market developments will turn around in the near future.”

Yet, he noted that “In Europe, we are starting to see the results of all the savings measures we’re taking. The other operations within Electrolux continue to deliver very strong results, and we have a strong cash flow. After the very comprehensive launch of new products in Europe last year, we have now further increased our focus on cutting costs within the operations, through the transfer of production to low-cost countries, a decrease in the number of employees and lower product costs. We are beginning to see results of these measures, while also recognizing that there is further potential to reduce costs within our European operations. Moreover, we must further increase our prices in Europe to compensate for rising raw material costs, just as we’ve done in the U.S.”


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