Clasificación Nacional Del Sector Hotelero

Global economy slow in 2014 – outlook for 2015 increasingly uncertain

The global economic recovery faltered this year. A broad self-sustaining upturn across all regions is not expected. This assessment is based to a large extent on the geopolitical uncertainties connected with the Ukraine crisis and the developments in the Middle East which are now being felt in the form of subdued economic indicators and weaker business and consumer spending. Global economic growth in 2014 will therefore be only slightly higher than the year before. Based on continued highly expansionary monetary policy, growth in the industrialized nations will increase to almost 2% this year. Current forecasts for 2015 indicate at best moderate expansion of just over 2%. Growth in the emerging economies will slow from just under 5% last year to just over 4% in 2014; in 2015 the rate of growth should approach the 5% mark again. Overall we expect the global economy to grow at a rate of 3% in 2014, only marginally higher than the year before. For 2015 we expect heterogeneous rates of expansion and – with the lowering of forecasts over recent weeks – no more than moderately stronger global economic growth overall provided the crises in Ukraine and the Middle East do not escalate further and the continuing uncertainties do not further impact business and consumer spending.

The economic recovery in the euro zone continues to proceed very heterogeneously and slowly and is characterized by periods of stagnation and decline – particularly in major member states such as France and Italy. Progress is being observed in some crisis countries such as Spain, Portugal, Ireland and partly also in Greece. However, necessary reforms and structural adjustments in some countries will continue to limit growth opportunities. Gross domestic product (GDP) is therefore expected to show only moderate growth of less than 1% this year. With forecasts trending downwards, only marginally stronger growth is currently expected for 2015.

45 Combined management report – Report on the economic position

Macro and sector environment

While the German economy is expected to expand in 2014, current indicators show that the effects of the weak growth climate in the euro zone and the crises in Ukraine and the Middle East will be felt here too and negatively impact the economic outlook. Overall growth in German GDP will be driven mainly by domestic demand. In addition to necessary maintenance capital investment, there will also be at least some growth capital expenditures due to rising capacity utilization and continued favorable financing conditions. Consumer spending will also increase thanks to rising incomes and a continuing solid labor market. However, foreign trade is expected to generate only little growth impetus. Overall German GDP will increase by 1.4% at most in both 2014 and 2015.

After a weather-related weak start to the year, the US economy has since picked up considerably. In view of the advanced deleveraging process among private households and continued improvements on the labor market, consumer spending is expected to accelerate as incomes rise. With economic conditions more favorable and business confidence higher, capital spending will also increase. The US economy will expand by just over 2% in 2014. In the coming year growth could be slightly higher.

GDP growth in China is expected to slow slightly both this year and next to just over 7%. While foreign trade should deliver slightly stronger growth impetus, the targeted shift towards greater consumption-led growth is not yet likely to be enough to offset weaker business spending. GDP growth in India will quicken slightly in 2014 on the back of slightly better foreign demand and accelerated implementation of ongoing infrastructure projects. However, the pace of expansion will fall well short of the growth rates achieved in the past decade. Economic growth in Brazil is slowing sharply and will virtually stagnate this year. Consumer spending, business spending and foreign trade have been weak in the year to date. What is needed in particular is an improvement in the conditions for investment, for example through reduced bureaucracy, simplification of the tax system, and infrastructure expansion. In 2015 growth will again be modest at best. Due to the continuing crises and large capital withdrawals, the Russian economy is expected to do little more than stagnate both this year and in 2015.

Industrial activity generally losing momentum with increased uncertainties

Automotive – Global demand for passenger cars and light trucks continues to expand overall. In the USA sales of light

vehicles in the period January to September 2014 came to 12.4 million units, up 5% from the same period last year. In China passenger car sales were 13% higher at 13.1 million units. The European market as a whole also showed growth year-on-year, with sales of light vehicles up 2% at 12.1 million units, but there were wide regional differences. New registrations on the German market climbed 3% to 2.3 million. Other European markets recorded significantly larger gains. Double-digit year-on-year sales increases were reported in Spain, Sweden, Portugal, Ireland and Greece. However, in Russia, Turkey, the Netherlands, Austria and Switzerland new registrations were down from the year before. In the emerging markets Brazil and India there are likewise no signs of improvement in sales. In Brazil 2.4 million light vehicles were sold in the period January to September, down 9% year-on-year. In India passenger car sales were level with the year before at 1.9 million units.

We expect global production of passenger cars and light trucks to increase by 4% to 85.5 million units in the current year; for 2015 we forecast slightly slower growth of 3% to 88.2 million units. Once again there will be wide regional differences. In China further strong growth of 8% to 24.4 million units is predicted. In the USA growth will slow from 5% to 3%. After shrinking by 13% this year, Brazilian auto production is expected to show 4% growth in the coming year. We expect output in Germany to continue to increase in 2014, though at a slightly slower rate than for the whole of western Europe. However, for 2015 we anticipate a 2% decline in Germany compared with 1% growth in production in western Europe overall.

46 Combined management report – Report on the economic position

Macro and sector environment

Important sales markets

2013 20141) ₂₀₁₅1)

Vehicle production, million cars and light trucks

World 82.5 85.5 88.2 Western Europe 12.6 13.1 13.3 Germany 5.5 5.7 5.6 USA 10.8 11.4 11.8 Japan 9.0 9.2 8.5 China 20.8 22.6 24.4 Brazil 3.4 3.0 3.1

Machinery production, real, in % versus prior year

Germany (1.4) 0.5 2.0

USA 2.3 6.8 5.7

Japan 3.4 10.2 5.9

China 8.6 8.9 7.4

Construction output, real, in % versus prior year

Germany 2.1 3.5 2.5

USA 6.8 3.5 6.0

China 9.5 8.3 6.9

India 3.6 6.5 6.6

Demand for finished steel, million tons

World 1,531 1,562 1,594

Germany 38.1 38.9 39.4

USA 96 102 104

China 741 748 754

1) _Forecast

Machinery – After a generally difficult 2013 machinery output is trending upwards again this year in most countries.

Despite slightly weaker economic growth the Chinese machinery sector could expand by around 9% in 2014 mainly owing to new projects to bolster the economy, though growth is expected to slow slightly in 2015. US machinery output is picking up well, with growth of almost 7% this year and a further 6% in 2015 on the back of improved industrial activity. Output in the countries of the European Union is expected to expand again in 2014 – albeit in many cases only moderately – with an overall increase of around 0.5%. Stronger growth rates of over 3% are currently forecast for 2015.

Activity in Germany's export-oriented machinery sector has been very sluggish in the year to date. Up until beyond the first half of the year, order intake was flat year-on-year. Export orders deteriorated, but there was a small rise in orders from the domestic market. An increasing loss of business with Russia has so far been partly offset by order growth in countries outside Europe. On account of the weak order situation, machinery output is now only slightly higher year-on-year. Orders in the German plant construction sector in the year to date have also been disappointing. In the 1st quarter 2014 order intake was down 47% year-on-year. Owing to the weak order situation and the geopolitical uncertainties, at best only marginal output growth is forecast for the German machinery sector as a whole in 2014; the higher expansion rates currently forecast for 2015 will depend on an improvement in global economic activity .

Construction – After a weak year last year, construction activity in western Europe has picked up in 2014. This year and in

2015 construction output is expected to increase by over 2%. The US real estate market seems to be continuing its recovery. Building permits and housing starts were up sharply year-on-year well into the second half of the year. Property prices – based on the S&P Case Shiller home price index – showed double-digit growth rates up to the summer. US construction output growth will exceed 3% in 2014 and accelerate further next year to 6%. Output in the German construction sector increased by over 5% in the period up to August 2014, though recently growth rates have been negative. Orders up to July 2014 were only around 1% up from the corresponding prior-year period. Overall companies have been working down their high order backlogs. The housing market continues to benefit from low interest rates and the positive labor market, as reflected in the positive trend in building permits. Construction activity in Germany is expected to rise by over 3% in 2014 and increase again in 2015, albeit at a slightly slower pace. In China, construction output will grow by around 8% this year and 7% next year, a slightly lower rate than in previous years.

47 Combined management report – Report on the economic position

Macro and sector environment

Steel – The situation on the European flat carbon steel market in 2014 was marked by higher volumes compared with last

year but also by continuing pressure on steel prices. Especially in the first quarter, output in steel-consuming industries grew strongly, leading to increased steel demand. This was additionally boosted by moderate seasonal restocking by users and distributors. From the 2nd quarter 2014 steel demand stalled again slightly but remained above the prior-year level. With materials readily available at short notice and stock levels adequate, steel customers became more cautious again. As a result, shipments by European flat steel suppliers to the EU market decreased again slightly. At the same time, imports from third countries increased; significantly more flat steel was imported in particular from the CIS states and also from Asia, aided in some cases by the firmer euro exchange rate in the first months of this year. Steel prices on the European spot markets, which had been quite robust in the first months of the year, slipped again from the spring. The downward pressure was reinforced by the large fall in iron ore prices since the turn of the year. In September European steel prices stabilized slightly; however, against the background of the increased economic uncertainty caused in particular by the ongoing geopolitical crises, the normal post-holiday period recovery in demand was moderate.

In the USA, the extreme weather conditions in the 1st quarter 2014 dampened the economy and the steel market. Subsequently steel demand recovered strongly. A continuing limited supply on the part of the US steel industry caused a sharp rise in steel prices in April and May – in strong contrast to the trend on other markets. However, prices came under some pressure again afterwards, though the price gap remained large. The reason for the decline was an increase in supply resulting both from higher imports and increased US output. On the back of strong growth in relevant steel-using industries such as the auto, energy and housing sectors, steel demand in the US will increase steeply over the full year 2014.

Growth in demand on the global steel market will remain subdued next year. Global steel demand is expected to grow by 2%, as in 2014, which is slower than overall economic growth. This is mainly due to China, where steel demand is expected to rise by only 1%, mainly as a result of the weak real estate market. However, in most other emerging countries growth will be more robust, and stronger than in 2014. With the economic recovery remaining moderate, we predict an increase in demand on the EU market of around 2%, after almost 3% this year. The risks in trade with markets outside the EU have recently increased further. For Germany too the outlook has darkened: Steel demand will rise by only just over 1% to approx. 39.4 million tons in 2015 – after increasing by 2% this year. With growth of 2%, the steel market in the USA is also expected to lose momentum year-on-year.

48 Combined management report – Report on the economic position

Group review