Economic Environment and Outlook

In the first half of 2019, global gross domestic product rose by around 2.7% year on year and was thus largely in line with our expectations. However, growth was mainly driven by the services sector. Global industrial production grew by around 1.5%, much slower compared with the first half of 2018 and well below our expectations. Industrial growth in the United States and Asia became increasingly weaker. In the European Union (E.U.), growth in the manufacturing industry was largely flat. Germany’s export-oriented industry even recorded a significant decline in production. The downturn in growth in the global automotive industry was particularly strong: Globally, production declined by around 6% in the first half of 2019. In China, the world’s largest automotive market, the decrease was more than twice as high, at around 13%.

At $66 per barrel of Brent crude, the price of oil in the first half of 2019 was below the average for the prior-year period ($71 per barrel). Growth in both demand and supply was weaker than in the first half of 2018. Declining production volumes from Saudi Arabia, Iran and Venezuela were offset by a growing oil supply from the United States.

Early indicators do not currently show any signs of a widespread recovery in industrial growth for the second half of 2019. In all industries, our customers are being very cautious with projections. Accordingly, our visibility on demand development is currently very low. This is significantly influenced by the development of the global economic environment. The trade conflicts between the United States and its trading partners have not eased to date, contrary to our forecast in the BASF Report 2018. In fact, the trade conflict between the United States and China in particular has since escalated to a new level. In Europe, uncertainty remains surrounding the conditions and timing of the United Kingdom’s departure from the E.U. The global business climate is also being overshadowed by geopolitical tensions between the United States and Iran. We are monitoring these developments and the potential effects on our business very closely.

We have adjusted our assessment of the global economic environment in 2019 as follows (previous forecast from the BASF Report 2018 in parentheses):

• Growth in gross domestic product: around 2.5% (2.8%)
• Growth in industrial production: around 1.5% (2.7%)
• Growth in chemical production: around 1.5% (2.7%)
• Average euro/dollar exchange rate of $1.15 per euro
• Average Brent blend oil price for the year of $70 per barrel

Risks relating to market growth, margins and regulation/policy in the form of trade conflicts discussed in the BASF Report 2018 materialized and led to a decline in earnings. For the second half of 2019, we anticipate a high level of uncertainty due to the above developments. For the remaining risk factors, the statements on opportunities and risks made in the BASF Report 2018 continue to apply overall. According to our assessment, there continue to be no individual risks that pose a threat to the continued existence of the BASF Group. The same applies to the sum of individual risks, even in the case of another global economic crisis.

As a consequence of the considerably weaker-than-expected business development in the second quarter of 2019 and the slowdown in global economic growth and industrial production, mainly due to the trade conflicts, on July 8, 2019, we adjusted the sales and earnings forecast¹ for the BASF Group made in the BASF Report 2018 as follows (previous forecast from the BASF Report 2018 in parentheses):

• Slight decline in sales (slight growth)
• Considerable decline in EBIT before special items of up to 30% (slight increase)
• Considerable decline in return on capital employed (ROCE) compared with the previous year (ROCE slightly higher than the cost of capital percentage, with ROCE slightly lower than in 2018)