Economic conditions

Macroeconomic development
The expansion of the global economy in the winter-half of 2011/12 is expected to be only modest. Major factors here include the slowdown in economic performance in Europe owing to the debt crisis and the effects of restrictive monetary and fiscal policy in some emerging economies. Global demand should pick up again later in 2012 provided that there are no further external blows to confidence, e.g. in connection with the debt crisis in the eurozone. According to the most recent estimates of the International Monetary Fund (IMF), global economic activity will continue to expand in 2012. Economic growth of 3.3% is anticipated. This global growth will largely be propped up by the resilience of what the IMF refers to as "emerging and developing" markets. The highest growth among what the IMF refers to as the "advanced" economies is forecast for the U.S.A. at 1.8%. However, this value is significantly less than the historic growth rates. Although some leading macroeconomic indicators are brightening, the IMF feels that the high unemployment, the devastated housing market and the need to reduce high public debt with austerity measures will keep growth in the U.S.A. moderate in the coming years compared to its historic average. Japan's economy, which shrank by 0.9% in 2011 owing to the natural disaster, is also expected to return to growth and expand by 1.7%. Canada's gross domestic product is likewise expected to rise by the same amount (+1.7%) relative to 2011. By contrast, the IMF's latest update from January 2012 forecasts a slight recession for the eurozone in 2012 with a decline in economic growth of 0.5%. Before economic activity gains pace again later in the year, growth in 2012 will initially be hampered by the repercussions of the debt crisis, the significant downturn in corporate and consumer confidence and the slower momentum of foreign demand. Of the euro area's four biggest economies (Germany, France, Italy and Spain), only Germany and France are expected to post slight increases in gross domestic product of 0.3% and 0.2% respectively.

The rise in consumer prices in the advanced economies should drop significantly in 2012 to 1.6%. This assumption is largely based on the projection that energy and food prices will increase only moderately.

The emerging and developing economies will increase their economic activity by 5.4% in 2012 (+6.2% in 2011). The slight slowdown in growth momentum is essentially due to the restrictive monetary and fiscal policy measures to reduce financial imbalance and inflation risks as well as weaker international demand. Given the close economic interactions of the countries of Central and Eastern Europe with those of the eurozone, the region is only expected to see growth of 1.1% after 5.1% in 2011. The biggest contribution to growth is again predicted to come from China. Its gross domestic product should grow by 8.2% in 2012. In turn, the IMF is projecting the second-highest contribution to growth from India. Accordingly, its economy will expand by 7.0% in 2012. Brazil's economy is set to grow by only 3.0% in 2012 (+2.9% in 2011). The rise in consumer prices in the emerging and developing economies is expected to drop from 7.2% in 2011 to 6.2% in 2012.

In accordance with the global growth profile, the expansion of world trade will slow to 3.8% in 2012.

The IMF is estimating an increase in global economic activity of 3.9% in 2013. According to the IMF, the biggest risks to global economic development in the coming months are the debt crisis in the eurozone and the possibility that the crisis will spread within the European currency union. Furthermore, the lack of a tenable plan for U.S. budget consolidation is also considered to be a risk. If, contrary to expectations, no agreement is reached on convincing medium-term financial planning to cushion the austerity measures legally set to take effect automatically in 2013, the U.S. economy could again slip into recession. All in all, the IMF is not anticipating any far-reaching turbulence as was experienced following the insolvency of Lehman Brothers in 2008. It does however feel that downward risks have risen significantly with regard to the economic outlook for 2012.

Eurozone
The economy in the euro area is being shaped primarily by the debt crisis and the necessary structural adjustments, including those to national budgets in particular. If the debt crisis and the tension on the international financial markets do not escalate further and, as a result, the insecurity felt by investors, companies and consumers gradually diminishes, it is assumed that the gathering momentum of the global economy over the year will also lift growth in eurozone. However, growth is expected to be significantly more muted in the euro nations with a more moderate subsequent recovery than in other industrialized nations. The IMF is forecasting a decline in gross domestic product in the eurozone of 0.5% for 2012. Of the euro area's four major economies (Germany, France, Italy and Spain), only Germany and France are expected to grow in 2012, although only slight rises in gross domestic product of 0.3% and 0.2% are expected. According to recent estimates, Italy's economy is expected to slide back into recession owing to the extensive restructuring reforms passed at the end of 2011. A decline in gross domestic product of 2.2% is forecast. Economic activity in Spain will also contract by 1.7% in 2012 following minor expansion of 0.7% in 2011. The substantial uncertainty with regard to the eurozone's economic performance in 2012 can also be clearly seen by the most recent forecasts from the IMF, OECD, European Commission and euro system experts. Growth in gross domestic product for 2012 as against the previous year ranges from -0.5% to 1.0%.

The IMF is projecting a slight rise in gross domestic product in the eurozone of 0.8% in 2013.

Germany
The public debt crises of some euro nations, the unease this is causing among companies and consumers and the general downturn in global economic activity will hamper performance in Germany in 2012. However, the deceleration in growth will seep into Germany above all through its exports. Despite this, the domestic conditions for a further recovery are still rated positively. Thus, it is expected that Germany's sideways economic movement with the possibility of a slight recession will have no impact on employment in the winter half of 2011/12 and that this will in fact improve moderately over 2012 as a whole. The slowing price rises for energy and food will reduce the increase in consumer prices in Germany in 2012 as against the previous year and have a positive impact on real income. Supported by a resurgence in growth in the global economy and the expansive monetary policy of the ECB, the German economy should return to more solid growth as the year progresses. As described above, the requirement for this scenario is that the debt crisis in Europe does not escalate and the nervousness this has caused gradually lessens. The IMF is forecasting an 0.3% rise in gross domestic product in 2012. However, it feels that the uncertainty and therefore the downward risks in relation to economic performance are particularly high at this time.

According to the IMF, gross domestic product in Germany should increase by 1.5% in 2013.

Russia
According to the World Bank, Russian companies and banks are directly affected by the debt crisis in the eurozone to only a limited extent as they have only minor trade relations with Greece and other highly indebted euro nations. Indirectly, however, a broad economic downswing in Europe could have extensive negative repercussions on economic activity in Russia, as a result of which prices for the commodities exported by Russia, predominantly oil and gas, could fall substantially, causing the country to suffer a considerable capital drain. As described above, it is currently assumed that the gathering momentum of the global economy over 2012 will also have a positive effect on growth in the eurozone. In light of this and given the geopolitical risks, the IMF is forecasting only a slight drop in oil prices. After a balanced budget in 2011, a deficit is anticipated for 2012 on account of the lower growth in gross domestic product and high government spending, particularly in the election year.

The IMF believes that the Russian economy will expand moderately in 2012 by 3.3% as against the previous year. A slight increase in gross domestic product growth of 3.5% is anticipated for 2013.

U.S.A.
The failure of the Super Committee to decide budget consolidation measures means that austerity measures arising from legal stipulations must now be implemented. It is difficult to forecast whether or to what extent these will affect the economy in 2012.

The U.S. economy is highly dependent on the growth of private domestic demand. The extent to which the economy could receive stimulus from this sector is dependent on the unemployment rate and the wage level. In 2011, higher consumption was financed in part only by a lower savings rate. The savings rate in 2011 was just 4.6%, its lowest level since 2007. In its World Economic Outlook of September 2011, the IMF is still predicting a high unemployment rate of 9.0% for 2012. The biggest stumbling blocks for the American economy other than its restrained domestic demand are external factors such as the European debt crisis. This could spread through the financial markets, U.S. banks with European exposure or what the IMF refers to as a global confidence shock. Replacement investments in 2012 are expected to suffer under the expiry of beneficial depreciation regulations at the end of 2011. These had caused a pull-forward effect for corporate investments in the past year.

However, more positive trends are emerging in the construction industry. The high level of unsold apartments is gradually falling. In the long-term, investments in residential construction would have to rise as the steady population growth in the U.S.A. should ensure corresponding demand. The U.S.A. will be dominated by the election in 2012, with Americans voting for their president on November 6. At the same time, a third of the senators and the entire House of Representatives will also be up for election. The conditions for effective decision-making in such an environment are likely to be relatively poor. Presumably, the new Congress will not get to grips with budget consolidation before January 2013. Essentially, this can only be achieved through a combination of lower spending and higher income from tax hikes. The resulting uncertainty in terms of general conditions could harm the momentum of economic performance in 2012. The IMF is assuming economic growth of 1.8% for 2012. However, the gross deficit should continue to rise owing to the delays in budget consolidation. According to the Organisation for Economic Co-operation and Development (OECD), the deficit is currently 97.6% of GDP and is set to climb to 103.6% in 2012 and 108.5% in 2013. Stronger price rises are not expected in 2012 on account of the relatively high unemployment rate and the somewhat moderate growth. According to the IMF, the inflation rate should drop to 1.2% by mid-2012. The Federal Reserve Bank (Fed) is therefore not expected to reverse its zero-interest policy before the middle of 2013. However, it is still signaling its willingness to assist the U.S. economy with further easing.

Brazil
The slowdown of the Brazilian economy in the 2011 reporting year was more severe than anticipated in spite of a relatively solid growth rate of 2.9%. Given its dependence on exports, including commodities, Brazil is likely to feel the effects of global economic cooling in 2012. The debt crisis in Europe should only impact Brazil in the event of an extreme scenario such as a shock or crisis of confidence, as a decline in risk propensity would also mean capital draining away from the emerging economies. Economic developments in emerging economies such as China could also have a not insignificant effect on the development of the Brazilian economy. Firstly, China is now a major customer for Brazilian exports and, secondly, it has a major influence on the development of global commodities prices. Commodity exports have played an important role in the economy in Latin American countries in recent years.

However, Brazil has significantly wider options for supporting its economy with monetary policy than the industrialized nations. Its central bank had begun raising interest rates early on, which means that it still has room to aid the economy by easing lending rates in spite of a cut at the end of the year. There is also greater flexibility in fiscal policy and its debt level is still healthy. The IMF is assuming growth of 3.0% in economic activity in 2012. The inflation rate is set to drop; the latest estimate by the IMF was 5.2%.

Japan
The strong yen and the global economic downturn – particularly in Europe and some emerging economies such as China – are continuing to exert pressure on Japanese exports. However, Japan is not expected to slip back into a recession in the first half of 2012 on account of the redevelopment of the region destroyed by the disaster and its strong domestic demand. In addition, the extra budget for 2012 passed in November 2011 should lend support in the first quarter. The IMF is forecasting economic growth of 1.7% for 2012.

The Bank of Japan has emphasized that it will continue its expansive monetary policy until sustainable growth and price stability have been achieved. Falling prices and a high budget deficit are still expected for 2012. The IMF is forecasting that the unemployment rate will remain below 5% in 2012. Its last estimate from September 2011 was 4.8%. The asset purchase program launched in 2010 to cut long-term interest rates has already been gradually expanded to ¥55 trillion. Further securities purchases of around ¥13 trillion are planned for 2012. It is also possible that the securities purchase program could be boosted in the event of a breakdown in growth.

China
In light of the slowing economic momentum in key sales markets of the eurozone, economic growth is set to decline further in the first half of 2012. As a result of the progressive tightening of monetary policy in the past 18 months, domestic demand is likely to become weaker for the time being. By starting to streamline its monetary policy, the Chinese government is pursuing the goal of cooling down its overheated residential market and limiting a rise in inflation. While the private residential market is cooling slowly, social residential construction is receiving massive subsidies under the new five-year plan. The government is aiming to build 36 million subsidized residential units by 2015. The resulting strength in the public sector should largely balance the weakness in the private sector. The IMF's growth forecast for the Chinese economy in 2012 is currently 8.2%. Given its relatively low public debt, the Chinese government should have enough scope to implement monetary and fiscal policy easing (e.g. by continuing to lower minimum reserve requirements for banks or relaxing lending standards). Furthermore, with inflation on the retreat, there is also a certain potential for lending rates to be cut in the first two quarters of 2012. Taking into account the delay needed for such stimulus measures to take effect in the past, a resurgence in growth would not be seen until later in 2012. The IMF is assuming a rate of inflation for 2012 of 3.3%, with unemployment still forecast at 4%.

India
Not all sections of India's population have been able to share in its rising affluence to date. In particular, one reason for this is thought to be the country's obsolete infrastructure, which is apparently limiting the volume of investments from abroad. India should be investing more heavily in the development of its infrastructure in future. In order to avoid a further increase in public debt, it should facilitate direct international investment in this area moving forwards. The Indian central bank is not expected to stray from its restrictive monetary policy. Given the high inflation rate, further interest rate hikes can also not be ruled out in 2012. A more restrictive monetary policy coupled with a slower expansion of the global economy should keep the growth rate for the Indian economy below 8%. The IMF is assuming growth of 7.0% for 2012. A drop in the inflation rate is not expected before the end of the first quarter of 2012. Basis effects are then likely to have a positive influence on inflation, with an inflation rate of 8.6% expected for 2012.

Industry development

Our key sales markets are the global business with vehicle manufacturers and the replacement markets for passenger, light truck and commercial vehicle tires. Western and Central Europe and NAFTA are particularly important in this context. Asia represents the third largest region, accounting for 17% of consolidated sales in 2011. Original equipment business with vehicle manufacturers has a significant influence on the performance of the Automotive divisions Chassis & Safety, Powertrain and Interior. The ContiTech division also generated more than 50% of its sales with the global vehicle manufacturers. By contrast, the replacement markets for passenger, light truck and commercial vehicle tires are vital for the Tire division.

For 2012, we are currently forecasting a rise in global car production to 77 million units. This corresponds to a 1% increase as against 2011. Asia will remain the key growth driver. In addition to a more than 7% increase in China's car production, we anticipate a recovery in vehicle production as against 2011 particularly in Japan, which recorded substantial production losses as a result of the natural disaster in March 2011. This assumption is supported by the fact that the Japan Automobile Manufacturers Association (JAMA) is forecasting a rise in new passenger car registrations of almost 800,000 units (+20%) for 2012.

In our opinion, these two factors alone will lead to an increase in car production volumes in Asia of at least 1.7 million units, 800,000 of which are attributable solely to the recovery of the Japanese market. For NAFTA, we likewise expect a mid single-digit growth rate. We are forecasting a 4% rise in production to 13.7 million units. Here, too, the complete restoration of Japanese manufacturers' production capacity will play a major role.

Production of light vehicles* in millions of units**
	2011	2012	2013
Total Europe	20.1	19.0	19.8
Western Europe	14.9	12.8	13.4
Eastern Europe	5.2	6.2	6.4
NAFTA	13.2	13.7	14.3
South America	4.1	4.1	4.3
Asia	37.2	38.9	40.3
Africa and Middle East	0.9	0.9	1.0
Worldwide	75.5	76.6	79.6
Source: IHS *passenger cars, station wagons, and light commercial vehicles (<6t) **preliminary figures and own estimates

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Due to the weak economic outlook for large parts of the eurozone, we expect to see a considerable decline in new registrations for this region, which is also likely to be reflected in falling production volumes for cars. However, thanks to the good export capabilities of German manufacturers in particular, we anticipate a decrease in car production of only around 5% to 19.0 million units.

For the production of commercial vehicles, we expect a 7% increase to 3.7 million units worldwide in 2012. After taking a breather in 2011, the Asian markets in particular should see significant growth again. For instance, Information Handling Services (IHS) – one of the leading research institutes for this region – forecasts an 11% increase in commercial vehicle production. The North American market is also expected to record high single-digit growth again in 2012. Only in Europe do we anticipate a decline in commercial vehicle production of 5%.

Production of heavy vehicles* in thousands of units**
	2011	2012	2013
Total Europe	547	520	575
Western Europe	435	385	420
Eastern Europe	112	135	155
NAFTA	408	440	472
South America	253	239	255
Asia	2,228	2,472	2,620
Worldwide	3,436	3,671	3,922
Source: IHS *commercial vehicles (>6t) **preliminary figures and own estimates

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We expect demand for replacement passenger and light truck tires to rise by 3% globally in 2012. Following the strong stock deliveries of winter tires and the relatively late onset of winter weather in Europe, it remains uncertain how high dealers' stock levels of winter tires will be at the end of March 2012. For this reason, and owing to the high comparative figures from the previous year, we anticipate at best a stagnation of the European replacement tire market at the previous year's high level. However, we also consider a mid single-digit decline possible if certain upcoming regulatory projects are not implemented in 2012.

In contrast, we are confident that the number of replacement tires sold in NAFTA will pick up again slightly in 2012. One reason for this positive assessment is that the total number of cars driven in the U.S.A. grew again in 2011 for the first time in three years. Furthermore, there has recently been a stabilization in miles driven, which are calculated by the Department of Transportation (DOT) on a monthly basis. We anticipate growth of 3% on the replacement passenger tire market in NAFTA.

Replacement sales of passenger, light truck and 4x4 tires*
in millions of units	2011	2012	2013
Western and Central Europe	297.0	297.0	303.0
NAFTA	253.0	260.6	268.0
South America	56.9	59.2	61.0
Asia	268.0	286.8	310.0
Other markets	111.0	116.0	122.0
Worldwide	985.9	1,019.6	1,064.0
Source: LMC World Tyre Forecast Service *preliminary figures and own estimates

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In 2012, Asia will once again be the fastest-growing replacement passenger tire market. We anticipate growth of 7% in 2012, bringing the Asia region almost to the level of the European replacement passenger tire volume.

We expect demand for replacement commercial vehicle and trailer tires to rise by 4% globally in 2012. Following the recent very weak development of demand for commercial vehicles tires on the European replacement market, which has recorded declining sales volumes since July 2011, we anticipate a 3% rise in demand to 19.2 million units in 2012. This assumption is backed up not least by monthly toll statistics published by the German Federal Office for Goods Transport (BAG). These statistics, which measure the kilometers driven on German roads by trucks subject to tolls with a permitted weight of 12 t and more, show that the number of kilometers driven increased by 4% in 2011. In NAFTA, we also anticipate a further increase in demand for replacement commercial vehicle tires in 2012. Here, too, the tonnage index calculated by the American Trucking Associations (ATA) displayed an upward trend particularly in the past months – in December 2011 alone, it recorded a 6.8% rise as against the previous year. Based on the recovery of the U.S. economy, we anticipate a continued increase in the tonnage data, which we also expect to cause demand for replacement commercial vehicle tires to rise by another 2%. This will bring NAFTA close to the peak levels seen in 2005, when there was demand for more than 21 million replacement commercial vehicle tires in the region.

Replacement sales of truck tires*
in millions of units	2011	2012	2013
Western and Central Europe	18.6	19.2	19.6
NAFTA	20.5	20.9	21.0
South America	14.0	14.6	15.0
Asia	66.5	70.5	76.0
Other markets	18.4	18.0	18.0
Worldwide	138.1	143.2	149.6
Source: LMC World Tyre Forecast *preliminary figures and own estimates

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