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REGIONAL FOCUS 7 August 2018

Facts & Figures: The Federal State of

AUTHOR The Federal Republic of is a country with a federal structure that consists of 16 federal Barbara Bahadori states. Hesse, which is situated in the middle of Germany, is one of them and has an area of just phone: +49 69/91 32-24 46 over 21,100 km2 making it a medium-sized federal state. [email protected]

EDITOR Hesse in the middle of Germany At 6.2 million, the population of Hesse Dr. Stefan Mitropoulos/ Population in millions, 30 June 2017 makes up 7.5 % of Germany’s total Anna Buschmann population. In addition, a large num- PUBLISHER ber of workers commute into the state. Dr. Gertrud R. Traud As a place of work, Hesse offers in- Chief Economist/ Head of Research Schleswig- teresting fields of activity for all qualifi- Holstein cation levels, for non-German inhabit- Helaba 2.9 m Mecklenburg- West Pomerania ants as well. Hence, the proportion of 1.6 m Hessen-Thüringen 1.8 m foreign employees, at 15 %, is signifi- TOWER Neue Mainzer Str. 52-58 0.7 m 2.5 m cantly higher than the German aver- 60311 am Main Lower - age of 11 %. phone: +49 69/91 32-20 24 Saxony 3.6 m 8.0 m Anhalt fax: +49 69/91 32-22 44 2.2 m North - Apart from its considerable appeal for 17.9 m immigrants, Hesse is also a sought- Saxony 4.1 m after location for foreign direct invest- Hesse 2.2 m 6.2 m ment. The per capita value of invest- - ments by foreign companies in Hesse 4.1 m is almost 100 % above the average for Germany as a whole. 1.0 m

Baden- Hesse is responsible for 8.6 % of Wuerttemberg 13.0 m 11.0 m Germany’s gross domestic product (GDP). Consequently, the federal state enjoys a higher-than-average

economic strength: per capita GDP is 14 % above the German av- Sources: Statistisches Bundesamt, Helaba Research erage. In terms of productivity, that is to say GDP per worker, Hesse is also number one compared to other German states (ex- cluding the city states of Berlin, Hamburg and Bremen) and exceeds the German average by 10 %. The Hessian unemployment rate, which is an average of 4.7 % in 2018 (January to July), was considerably below the overall German level of 5.4 %. This publication was very carefully researched and pre- pared. However, it contains Selected figures analyses and forecasts regarding current and future Germany Hesse market conditions that are for 2 informational purposes only. Area (in km ) 357,340 21,115 The data is based on sources that we consider Population* (in millions, June 2017) 82.7 6.2 reliable, though we cannot GDP (nominal, EUR billions, 2017) 3,263 279 assume any responsibility for the sources being accurate, GDP per inhabitant (in EUR, 2017) 39,500 44,800 complete, and up-to-date. All statements in this publication GDP per worker (in EUR, 2017) 73,700 81,300 are for informational purpos- es. They must not be taken Unemployment rate (in %, Ø Jan.- Jul. 2018) 5.4 4.7 as an offer or recommenda- Sources: Statistische Landesämter, Bundesagentur für Arbeit, Helaba Research tion for investment decisions.

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Hesse stands up well to international comparison, too. Hesse’s GDP, for example, is almost as high as Denmark’s. Per capita output in Hesse is 50 % above the average of all EU countries.

Hesse’s GDP almost as high as Denmark’s Hesse: the service sector state GDP (nominal) in EUR billions, 2017 GDP (nominal) per capita in EUR Share of gross value added in %, 2017

400 70 000 GDP per capita Public and other services 20% 22% 350 60 000 GDP 300 50 000 Financing, , renting, 31% 26% 250 business service providers 40 000 200 30 000 Trade, transport, tourism, 21% 150 23% telecommunication 20 000 5% 100 Construction 4% 50 10 000 Total industry 26% (without construction sector) 22% 0 0 Agriculture, Ireland Denmark Hesse Finland Hesse Germany Sources: Arbeitskreis VGR der Länder, Eurostat, Helaba Research Sources: Arbeitskreis VGR der Länder, Helaba Research

The most important factor for Hesse’s high level of economic strength is, in particular, the sector mix: No other federal state is able to simultaneously boast of a significant , an inter- national airport and a well-known location for trade fairs. This is also reflected in statistical data: A third of Hessian gross value added is generated in the area of the economy of “financing, insur- ance, renting, business service providers”. The sector of “trade, transport, tourism, telecommunica- tion” contributes a further 23 % to output.

Sector mix in Hesse: The financial centre of Frankfurt is one reason for the extraordinary sector composition in Hesse: Financial centre, airport, 203 domestic and foreign banks have their German head office in Frankfurt, which represents trade fair, chemicals & pharmaceuticals 44 % of all credit institutions in Germany operating on a supra-regional level (i.e. excluding savings banks and co-operative banks). Another reason is , which is a key factor for the location and handles 27 % of the total passenger traffic and 45 % of the total volume of air freight in Germany. It is thus the undisputed leading airport in Germany, the second largest Continental European logistics hub for goods as well as the third-largest for passengers after Paris and Am- sterdam. Messe Frankfurt, Frankfurt’s trade fair, is yet another asset that strengthens the interna- tional focus of the region. In terms of visitors and exhibitors, the trade fair is in the vanguard of Germany´s fairs, whereby international exhibitors particularly appreciate its location.

Chemicals/pharma biggest industrial sector in Hesse German industry: automotive important Hesse: Share of industrial revenues, 2017 Germany: Share of industrial revenues, 2017 Electric/ Electric/ Basic metals, Basic metals, electronic/ electronic/ metal products metal products optical optical 13% 11% products products 9% 10% Machinery, Motor vehicles Machinery, Motor vehicles equipment other transport equipment other transport 13% equipment 9% equipment 17% Food products, 24% beverages 7% Food products, beverages Rubber/plastic Chemicals, 9% products pharmazeutical Chemicals, Rubber/plastic products 7% pharmazeutical products 24% All others products All others 4% 15% 11% 18% Sources: Hessisches Stat. Landesamt, Helaba Research Sources: Statistisches Bundesamt, Helaba Research

Manufacturing industry (excluding construction), with a share of 22 % of gross value added, plays a smaller role in Hesse than the overall German share of 26 %. Within the industrial production segment, there are significant focal areas in Hesse: A quarter of industrial revenues are generated by the segment of chemicals & pharmaceuticals. Motor vehicles/other transport equipment and the metals sector account for 17 % and 13 % of Hessian industrial revenues, respectively. Thus, three

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sectors are responsible for 54 % of revenues. The structure of German industry as a whole is con- centrated in a similar way, albeit with the automotive and mechanical engineering sectors dominat- ing.

The 25 largest The economic structure of the federal state is clearly reflected in Hesse’s largest companies. The companies following ranking1, which we compiled ourselves, is based on a company’s total workforce in Hesse and is not measured by its German or global significance.

Ranking of 25 largest companies in Hesse1

Rank Company Sector Rank Company Sector

1 Deutsche Lufthansa AG Transportation 15 Metro Group Wholesale and retail trade Chemicals, pharmazeut. 2 Rewe Group Wholesale and retail trade 16 Group products 3 AG Transportation 17 WISAG Facility Service Holding Service to buildings 4 Konzern Transportation Pharmazeutical products, 18 B. Braun AG 5 Deutsche Post Gruppe Transportation medical engineering 6 AG Banking Procter & Gamble Germany 19 Chemicals 7 Deutsche Telekom AG Telecommunications GmbH & Co. Operations oHG Electric/electronic 8 Continental Konzern Automotive supplier 20 Siemens AG products 9 Volkswagen AG Automotive industry 21 Helaba Konzern Banking 10 Adam AG Automotive industry 22 Stadtwerke Frankfurt am Main Utility, Transportation 11 Rhön-Klinikum AG Hospitals 23 Bilfinger SE Construction 12 DZ Bank Gruppe Banking Pharmazeutical products, 24 Fresenius SE & Co. KGaA 13 AG Banking hospitals Chemicals, pharmazeut. Chemicals, utility, real 14 Merck KGaA 25 AG products estate Sources: Helaba Research, Hessen Agentur

High export ratios The export ratios of industrial companies have risen strongly over the last twenty years. With a share of 56 % of foreign turnover as a proportion of total revenues in January to May 2018, Hesse achieved an export ratio that exceeded the German average. The economic crisis of 2008/2009 led to a slump in domestic and foreign demand, so that total export ratios declined slightly. German and, consequently, Hessian companies were able to benefit from the worldwide recovery in 2010 and export ratios rose again. As the domestic economy strengthened, export ratios initially re- mained largely constant. In 2015, the average export ratio of all German states saw another slight increase, but it fell back somewhat in Hesse due to the weaker development in some industrial branches. However, since 2016 the Hessian export ratio returned to growth above the average.

Export ratios on a high level Exports primarily destined for Europe Foreign turnover as proportion of total revenues in % Share of exports, 2017 60 60 8% France 8% Netherlands Hesse 7% Netherlands 7% Italy 55 55 5% 5% Austria 4% Austria 5% Spain 4% 3% 4% Belgium Belgium Other Eurozone 8% 50 50 Other Eurozone 8% Germany 5% UK 7% Poland 5% 45 45 UK 7% Other EU 6% Other EU 10% 40 40 11% USA 9% China 6% China 7% 35 35 Other Asia 10% Other Asia 10%

30 30 Other countries 14% Other countries 16% 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18* Hesse Germany *Average of January to May 2018 Sources: Statistisches Bundesamt, Helaba Research Sources: Statistisches Bundesamt, Helaba Research

Main destination for The euro area was the main destination for exports in 2017, accounting for 36 % of goods exported exports: Europe from Hesse, with neighboring countries and Italy being the most important markets. Two-thirds of Hessian exports were destined for Europe as a whole. Asia was the second-biggest destination (with a 16 % share of exports), with China as the primary importer. As the country with the largest

1 For Hesse, the ranking is based on data of 2012. Experience shows, that there are only minor changes in companies and ranking positions.

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single share of Hessian exports, the United States played an important role for companies in Hes- se, with the pharmaceutical industry responsible for the majority of goods shipped here. Its share of exports to the US amounted to 37 %. The sectors of electrical engineering/optics/electrical equipment, chemicals, machinery and metals followed far behind (12 %, 11 %, 11 % and 9 %). With a proportion of 4 %, exports of motor vehicles and automotive parts were not one of the main business areas. In this respect, Hesse would only be partially affected by the protectionist trade policy of the United States, even if customs duties on automobiles were raised.

Nevertheless, the US President Donald Trump’s impetuous utterances and the ensuing discus- sions are leading to uncertainty regarding the profitability of old and new production sites around the world. This is likely to put a dampener on demand for capital goods that will place an additional burden on German industry on top of the slowdown in euro area economic growth. This means that it will probably no longer be possible to see a repeat of GDP growth (not calendar adjusted) in Hesse over the last two years of 2.2 % (2017) and 2.3 % (2016). However, it is likely that domestic demand will continue to support economic growth, as Germany is still registering real wage in- creases of around 2 %. The outlook for GDP growth in 2018 is likely to be more or less limited to the average level forecast for Germany of around 2 %. This is what data for the current year is pointing towards.

Three years of economic growth Improvement of labour market continues Real change in GDP yoy in % Unemployment rates in % of total workforce

6 6 12 12 Germanny 11 11 4 4 Hesse 10 10 2 2 9 West Germany 9 0 0 8 8 -2 -2 7 Germany 7 -4 -4 6 6

-6 -6 5 5 Hesse -8 -8 4 4 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18* 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18*

*Forecast *Average of January to July 2018 Sources: Statistisches Bundesamt, Helaba Research Sources: Bundesagentur für Arbeit, Helaba Research

Rising employment The overall high output level of recent years is continuing to have an effect on the Hessian labour market. Since 2014 the unemployment rate in Hesse is declining and with a rate of 4.6 % in July

2018 it is in the area of full employment (4 % to 5 %). Furthermore, the stability of the labour mar- ket is reflected in the employment trend of jobs subject to social insurance contributions, which has been almost constantly positive for the last eight years. In this respect, local employees are not the only ones who are able to find a new job, but companies are also able to fill vacancies, according to their requirements, with migrant jobseekers as well.

The economically strong federal states generate considerably higher tax revenues. In this regard, the per capita financial strength of Hesse is 25 % above the German average in terms of both income and corporation taxes. Since, on the one hand, Germany is a federal country and, on the other, is concerned about ensuring the uniformity of living conditions, value added tax is distributed according to other criteria, so that financially weak federal states are able to catch up. The ensuing fiscal equalisation system between federal states leads to a further harmonisation of per capita income, which is additionally boosted by general supplementary federal grants. As a consequence, per capita financial strength in Hesse is only 2 % above the German average after these redistribu- tive measures.

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Public debt: Hesse slightly above average

Public debt of federal states per inhabitant in EUR, December 2017

13 85013

9 263 9

8 925 8

7 763 7

7 666 7

7 191 7

7 101 7

6 625 6

6 340 6

6 050 6

4 872 4

3 441 3

1 315 1 381

Total Saxony Bavaria - Mecklenb.- Branden- Hesse Thuringia Lower Rhinel.- North Schlesw.- Saxony- Saar- Wuertt. W. Pom. burg Saxony Palatinate Rhine- Holstein Anhalt land Westphalia Sources: Bundesfinanzministerium, Helaba Research

Hesse with good rating The closely intertwined system of fiscal harmonisation between the federal states as well as the thanks to high level of constitutional guarantee of existence for the federal states prompts the rating agency Fitch to cou- financial strength ple the ratings of German states to that of the Federal Republic of Germany. Thus, in principle Hesse could receive a “AAA” rating if it had an active rating relationship to Fitch as an issuer. Standard & Poor’s cites the economic performance as well as debt situation and differentiates accordingly, with Hesse receiving a “AA+” rating (Outlook: stable). This is because, although the state displays high tax revenues thanks to its strong economic fundamentals, in terms of per capita debt it is above the German average, in contrast to Bavaria and Saxony. 

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