(Bloomberg) -- Germany is becoming an outlier for corporate distress in Europe as its export-driven economy battles against faltering global demand and persistent price pressures.
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The continent’s biggest economy is set to be ranked as its most distressed market for a second year running, according to forecasts from Weil, Gotshal & Manges LLP. In the law firm’s pessimistic scenario — which includes further supply chain disruptions and protectionist trade policies — levels of distress in Germany could exceed the heights reached during the pandemic.
“It wasn’t obvious a year ago that it was very much Germany versus the others,” said Andrew Wilkinson, a partner at Weil and co-head of the firm’s restructuring practice. “I think it is now clear that’s the case and that’s a very unusual thing for Europe.”
Rising pressure in Germany comes against a backdrop of easing, albeit still-elevated, distress across the rest of Europe over the next year. The country’s large real estate market is still grappling with the fallout from the rapid rise in interest rates in recent years, while major industrial players such as automaker Volkswagen AG and chemicals giant BASF SE are undertaking widespread cost-cutting measures, which is having ripple effects across the economy.
The Weil European Distress Index, which is compiled from data from over 3,750 listed European companies, defines distress as “uncertainty about the fundamental value of financial assets, volatility and increase in perceived risk” as well as business disruption that may impact the ability to pay down debts.
Industrials were the most distressed sector in Europe in the most recent quarter, with levels of distress at the highest since September 2020 on a rolling three-month basis, according to Weil’s data. With businesses deferring large scale projects on the back of higher capital costs and uncertain demand, its “vulnerable to stagnation,” the report said.
“I don’t expect, and we didn’t see this in the global financial crisis in 2008, large automotive and manufacturing businesses in Germany to go bust,” said Wilkinson. “The suppliers, on the other hand, I think we’ll find get squeezed, and squeezed pretty hard.”
Already, Germany has seen a number of suppliers file for insolvency including engineering company Manz AG, whose investments in battery technology floundered in the face of weak demand, and auto supplier Walter Klein GmbH, which counts Mercedes Benz and Volkswagen as customers. Overall, Germany had the highest number of corporate insolvencies since the financial crisis in the fourth quarter of 2024, according to the Halle Institute for Economic Research.