Economic risks

2012 was another difficult year for the world economy, so overall expansion of 2.5% was significantly below the existing growth potential and also lower than the previous year’s growth of 3.2%. The world economy was and still is sensitive to external disturbances. We see the biggest individual risks for the year 2013 in a renewed worsening or escalation of the sovereign-debt crisis in the euro zone, the resulting turmoil in the financial markets and the banking sector, uncertainty about budget and fiscal policy in the United States, a growth slump in China, high price volatility in raw-material markets due to geopolitical unrest in the Middle East, further inflationary pressure and nascent protectionism. The development of the world economy in 2013 that is expected by the majority of economic research institutions, and also by Daimler, is highly dependent on those risk factors. Some of those risk factors certainly have the potential, if they occur, to lead the world economy into a renewed recession. This means that there are still considerable economic risks for Daimler’s financial position, cash flows and profitability.

The measures taken for the reduction of the burden of debt on public budgets in Western Europe, the United States and Japan are still one of the dominant issues for the world economy and could dampen economic prospects and have a substantial negative impact on the financial markets once again in 2013. This applies in particular to the risk of a sovereign default, which cannot be entirely ruled out above all for Greece, but also for some of the other peripheral countries despite the support programs provided by the European Union and the International Monetary Fund (IMF). Austerity measures have the potential to depress domestic demand in the affected countries even further, so that their national economies might contract even more than previously expected. Another risk is that after the countries of the euro zone, the financial markets might focus on other highly indebted countries such as Japan or the United States.

As in the past two years, we see the development of the euro zone as the biggest risk for the world economy. The economy of the euro zone slipped into recession in 2012, and prospects for the year 2013 remain difficult. The political implementation of reforms and other actions for budget consolidation in the countries of Southern Europe could be slowed down by increasing public protects or decreased pressure to reform following the announcement of measures to be taken by the European Central Bank. This would lead to a massive loss of confidence in the capital markets and thus to increased volatility and rising interest rates. The burdens on government budgets and on the banking system would be hard to manage and could further jeopardize a recovery of the real economy. Even the risk that the reform process in Greece will fail altogether has not been completely averted despite the renewed aid package in late 2012. If no further reform steps are taken – whether for political or economic reasons – or if public rejection is too great, this could finally lead to Greece’s exit from the euro zone with significant contagion effects for the global financial system and the world economy. Unlike the global financial crisis of 2008/09, most European countries would no longer be able to afford to recapitalize their national banks or to stimulate their economies by means of fiscal policy. Due to global interconnections, the then inevitable banking crisis and recession in the euro zone would probably spread to other countries with severe consequences. Such a case would result in a global recession. Due to the ensuing crisis of confidence and credit crunch, both consumption and investment would fall drastically – along with demand for cars and commercial vehicles. For Daimler, such a development would not only reduce unit sales considerably, it would also have a very negative impact on refinancing costs and possibilities.

Although the United States managed to avoid some of the feared impact of the “fiscal cliff” at least temporarily, the country’s government continues to be faced with considerable pressure to consolidate its finances. The agreement reached at the beginning of 2013 only included the most urgent issues and in fact only avoided a direct drift into recession in the first quarter. But the level of debt is grave as ever and will stay right at the top of the political agenda. This includes above all raising the debt ceiling as well as the approach to and design of the automatic spending cuts. Uncertainty about the direction of US fiscal policy and potential steps to be taken to balance the budget will thus remain as negative economic factors also in 2013. Due to the continued comparative weakness of investment and the real-estate market, the continuation of historically high unemployment, and fragile consumer confidence, the US economy would not have many options to counteract an unexpected budget-policy shock. In this case, the United States could slip into recession for one or several quarters. An escalation of the debt crisis in the euro zone, for example in the form of one or several exits by euro member states, would have a massive impact on the global economy and thus also on the US economy. These could have negative effects for the passenger cars and the truck market demand.

A lasting growth slump in China would be of strategic importance for Daimler. It already became clear during 2012 that the Chinese growth model is not invulnerable. As a result of the global growth slowdown, but also due to the weakness of the country’s real-estate sector, expansion of Chinese GDP fell to its lowest level since the global finance and economic crisis. But as China has become the main driver of world growth in recent years, a growth slump in China would have massive consequences for the global economy. Although economic development stabilized again towards the end of 2012, thanks to stimulating economic policies, risks still remain. If the expected significant recovery of GDP expansion does not materialize in 2013, the Chinese government could take fiscal and monetary countermeasures. But this would further exacerbate the budgets of local municipalities, which were already massively burdened by the stimulus programs of 2008/09, thus substantially limiting the scope of future debt. An additional factor is that repeated one-sided support for investment and exports could further delay the targeted balancing of the country’s growth model with increased private consumption. That would further increase the medium-term risks for growth of over-investment and export dependency, making a “hard landing” of the Chinese economy in the coming years more likely. A slump in growth rates to less than 6% would have an enormous impact on the world economy, especially on exporters of raw materials in the Middle East, Africa and Latin America. As well as their importance for worldwide demand for raw materials, Chinese companies have increasingly invested abroad in recent years, in emerging markets and in the EU. In the case of a growth slump in the domestic market, such investment would undoubtedly decrease and cause further headwinds for the development of the OECD countries.

As the year 2012 has shown in Brazil and India, other emerging markets that are also highly important for Daimler can also unexpectedly enter phases of economic weakness. This has immediate effects on demand for cars and commercial vehicles in those regions, and is a risk that cannot be discounted also in 2013.

As in the previous years, significant geopolitical risks exist, especially in the Middle East, with the potential to massively disturb the global economic equilibrium. There is a danger for example of an escalation of the nuclear conflict between Iran on the one side and Israel and the United States on the other. A military escalation or a blockade of the Strait of Hormuz could result in an oil-price shock, which would drastically reduce global growth rates and in an extreme case could even plunge the world economy back into recession. Developments in Egypt, Libya and Yemen remain uncertain, still no end is in sight to the civil war in Syria. The combination of several of these potential risks in the Middle East could lead to significantly higher oil prices in 2013. Even in a relatively mild scenario, higher oil prices would reduce demand in many countries and as part of a chain reaction could also influence prices of other raw materials, including food. Rising inflation rates would require stricter monetary policy on the part of the central banks than we currently anticipate. This in turn would dampen growth in the emerging markets and growth in the weakened industrialized countries would at least be brought to a standstill.

In order to counteract the global growth slowdown and the various associated risks, the large central banks, especially in Europe and the United States, have continued or even expanded their unconventional monetary policies with nearly no limitations on duration or extent. The enormous volumes of liquidity provided by those policy actions have the potential to significantly raise inflation expectations in the medium term, with corresponding medium-term risks for price stability. Furthermore, the spread of available liquidity could be increasingly reflected in the development of raw-material prices. When market players in search of high-yield investments increasingly invest in raw materials, prices worldwide could increase at a higher rate than is fundamentally justified. This would lead to a massive burden for consumers and manufacturing companies; on the other hand, a bursting of the ensuing speculative bubbles would have a drastic impact on global economic activity, especially in countries that export raw materials. And the effects of expansive monetary policy on global currency exchange rates also involve considerable risks.

Excessive liquidity also results in speculative capital movements, which have led to unwanted exchange-rate developments in some countries, such as the appreciation of the Japanese yen and of the Brazilian real. If these developments continue this year, there is a danger that individual countries will attempt to defend their competitiveness in the world’s markets by resorting to interventionist and protectionist actions. This could culminate in competitive devaluation or a “currency war.” Daimler’s position in key foreign markets could also be affected by an increase in bilateral free-trade agreements outside the European Union.