Strong Euro Causes Volkswagen Profits to Crash

Volkswagen, Europe's biggest car maker, saw profits crash by two-thirds in the first quarter of the year, dragged down by a combination of weak economies, the strengthening euro and the costs of revamping its model line-up.

Wolfsburg-based VW's lacklustre figures came on a bad day for the German economy with news that industrial orders had plunged almost 4% in March while seasonally adjusted unemployment rose in April for the 13th month in succession.

The economic data left German economists and trade unions urging the European Central Bank to cut interest rates at its meeting today to boost German growth.

"There's no point expecting a recovery this year," said one Frankfurt-based analyst.

VW sought to bolster investor confidence by forecasting that it expected to sell more than 5m cars again this year - and that operating profits would recover significantly in the second half of the year. However, it repeated earlier warnings that it was unlikely to match last year's profits performance when it made €4.76bn (£3.4bn), particularly if the euro remained strong against key currencies - the dollar, sterling and the Chinese renminbi.

In the first three months VW said pretax profits had slumped to €331m from just under €1bn a year ago. Sales increased slightly to just over 1.2m vehicles with China leading the way and the UK and Italy providing bright spots in the western European market.

In the US the combination of the weak economy and a fierce price war in the automotive market saw VW group sales fall by almost 11%.

In its home market VW said sales had slumped by 5.6% to some 212,000 vehicles. The car maker was quick to heap some of the blame on the Berlin government's planned tax increase on the private use of company cars.

"The debate surrounding the planned tax increase led to a marked reluctance on the part of German consumers to buy and significantly depressed first quarter sales of company cars, which represent a major portion of the market," the company said in a statement.

Yesterday's figures for the German economy showed that industrial orders had slumped 3.9% in March while seasonally adjusted unemployment had surged to 4.446m in April - a post-war record for the month.

The headline number fell to just under 4.5m, less than had been expected.

"Weak growth abroad, the euro appreciation and the need for corporate debt reduction suggest the German economy should grow by a mere 0.5% this year," said Jörg Krämer at Invesco Asset Management.

Economist Ralph Solveen at Commerzbank warned that unadjusted unemployment could rise to more than 5m in the winter. He said the strong euro was "certainly a dampening factor".