External factors of influence

Economic factors

NORMA Group is active in many different industries and regions. Seasonal and economic fluctuations in individual countries or industries can have an impact on customer demand and the order situation of NORMA Group. At the same time, NORMA Group is less vulnerable to temporary declines in demand in individual industries or countries thanks to its diversified product portfolio and broad customer base.

Global economy relatively robust in 2023 despite polycrises, inflation and higher interest rates

The global economy recovered only slightly in 2023 after overcoming the coronavirus pandemic. According to the International Monetary Fund (IMF), this was due to long-term burdens. These include geopolitical tensions and upheavals, in particular Russia's war of aggression in Ukraine, as well as the political and economic fragmentation that can be observed worldwide. The dissolution of established supply chains as well as new trade conflicts and sanctions curbed global free trade. In addition, cyclical factors such as high inflation and tighter monetary policy, the expiry of the previously stimulating pandemic fiscal packages, increased debt and frequent extreme weather events also had a negative impact in 2023. While the US economy was surprisingly strong in 2023, China and Europe in particular performed weakly. Nevertheless, the global economic trend was better than initially expected. The Kiel-based IfW assumes that the global economy will have grown by 3.1% in 2023 despite all the burdens. According to the IMF, global growth also amounted to 3.1%, although momentum in the industrialized countries was very low at just 1.6%. In contrast, the economic output of emerging and developing countries rose by 4.1%.

China showed a radical change of course at the beginning of 2023 by completely abandoning its strict zero Covid policy. Despite this, the economy was slow to recover. The main negative factors here were the crisis in the construction and real estate sectors, high youth unemployment, the weaker consumer climate and subdued export demand. Investments also lost momentum noticeably. In order to stabilize the economy against this backdrop, the central bank eased interest rates further. The government also took measures to support the construction industry. China's industrial production remained robust with an increase of 4.6%. The automotive and mechanical engineering sectors in particular were on the upswing, as was the production of solar cells. The economy in Southeast Asia (ASEAN-5) also continued its recovery after the pandemic (+4.2%). In India, growth was also positive (+6.7%), driven by lively private consumption and government infrastructure expansion.

In the US, the originally feared slide into recession in 2023 did not materialize. On the contrary, the economy there proved surprisingly resilient and dynamic with growth of 2.5%, despite the Fed continuing its restrictive course to combat inflation. Overall, the key interest rates were raised in four further steps until July 2023. The reasons for the nevertheless strong domestic demand were rising real incomes on the one hand and a very expansive fiscal policy on the other. Both effects resulted in very lively private consumption. On the other hand, industrial development faltered noticeably due to higher interest rates: US industrial production stagnated (+0.2%) and capacity utilization was lower than in the previous year at an annual average of 79.3%.

Europe's economy close to stagnation in 2023 due to headwinds

The European economy proved to be very weak due to high levels of uncertainty. To curb high inflation, the ECB raised the key interest rate in six steps to 4.50%. Interest rates were also tightened in the UK and Switzerland. As a result, the economy in both countries grew only moderately. Overall, the Eurozone lacked impetus from abroad. In addition, domestic demand faltered noticeably due to the sharp rise in the cost of living. Furthermore, the significant tightening of monetary policy led to an increase in financing costs. Taken together, these factors resulted in a slowdown in economic development. At the end of 2023, price pressure eased again as energy prices fell, resulting in an inflation rate of 2.9% in December (December 2022: +9.2%). Industrial production (excluding construction) in the Eurozone has contracted since March 2023, with the decline accelerating significantly again from August 2023. Capacity utilization fell steadily. It averaged 79.4% in the final quarter of 2023 compared to 81.4% at the end of the previous year. At the turn of 2023/2024, the Eurozone was in an economic slump. According to the Eurostat statistics office, the gross domestic product grew only marginally by +0.5% in 2023. In a comparison of the Eurozone, the trends in Spain, Portugal and France were better, but worse than average in Germany, Austria, the Netherlands and parts of Scandinavia.

Germany's economy in decline in 2023, industrial sector under pressure

The German economy faltered in the crisis-ridden environment and shrank by 0.3% in 2023, according to the Federal Statistical Office (Destatis). This was triggered by high prices at all levels of the economy, less favorable financing conditions due to higher interest rates and lower demand domestically and from abroad. Private consumption fell by 0.8%, mainly due to inflation, and even fell below the level of the pre-crisis year 2019. In addition, government consumption declined for the first time in three years, especially as publicly financed coronavirus measures had expired. While investment in construction fell significantly, particularly in residential construction, due to high construction prices and the sharp rise in interest rates, investment in machinery, equipment and vehicles increased noticeably. The main driver for this was the boom in commercial electric vehicles driven by an environmental bonus.

The stabilization of supply chains with the gradual overcoming of material bottlenecks and the reduction of accumulated high order backlogs tended to be positive for the German industrial economy. However, new business remained weak until the end of the year, meaning that the German industry came under increased pressure from June 2023. Energy-intensive industries in particular – including the chemical, steel and aluminum sectors – have reduced their production. According to the ifo Institute, they must undergo a far-reaching structural change in response to the massive energy price shock triggered by Russia’s attack on Ukraine. Overall, capacity

utilization in German industry has fallen further. In the final quarter, it averaged 81.7%. This was a total of 300 basis points less than a year earlier.

Exchange rate fluctuations

Due to its international activities, exchange rate fluctuations have an impact on NORMA Group’s business.  RISK AND OPPORTUNITY REPORT

In fiscal year 2023, NORMA Group generated around 40% of its sales in US dollars. The development of the US dollar against the euro led to a negative effect on sales in fiscal year 2023. There were also further negative effects from the Chinese renminbi yuan.

Industry-specific influencing factors

Mechanical engineering stagnates worldwide in 2023 with predominantly low propensity to invest

In the difficult economic environment with high energy costs, global industrial production (excluding the construction sector) grew only minimally by 0.8% in the first eleven months of 2023 (2022: +3.2%). This development had the effect of slowing down the willingness to invest worldwide. Exceptions to this were the mechanical engineering and automotive industries in China, which saw increased investment. In the USA, too, massive subsidies were used to stimulate semiconductor factories and renewable energy production. By contrast, capital investment in the UK slipped into negative territory after a robust start to the year, and investment in machinery and equipment in the Eurozone lost momentum from the summer onwards. According to the VDMA (German Engineering Federation), global machine sales stagnated in this environment. At country level, the trends in this regard were in some cases clearly contradictory. India and Turkey, for example, achieved strong increases in sales (+10% in real terms in each case), while machine sales in Taiwan plummeted (-17%). Brazil (-6%), South Korea (-5%), Japan (-6%) and the USA (-3%) also performed weakly, whereas machine sales in Canada (+5%) increased. China’s mechanical engineering sector grew very moderately at +2%.

The European mechanical engineering sector proved robust in the challenging environment of 2023. However, the supporting effect of the high, pent-up order backlog waned over the course of the year. According to the VDMA, price-adjusted machine sales in Switzerland fell by 2%. In contrast, the sector in the UK has recovered noticeably with growth of 5% in real terms. In the EU, as in the Eurozone, the mechanical engineering sector recorded a decline of 1% in real terms. Developments varied greatly from country to country. Real sector sales in Poland (+4%), Belgium (+4%) and Sweden (+3%) grew robustly, while the sector stagnated in France and Spain. In Italy and Denmark, sector sales fell slightly (-1% in each case). In the Netherlands (-5%) and some Eastern European countries, the mechanical engineering sector experienced a significant downturn in 2023. In Germany, the sector had to accept real sales losses of 2% in 2023 with nominal growth of 9%. Production in the mechanical engineering sector in Germany fell by 1% in real terms.

Strong recovery in global car and commercial vehicle production almost without exception

The global automotive industry recovered at double-digit rates almost everywhere in 2023 despite considerable burdens. According to Global Data (GD, formerly LMC Automotive), sales of light vehicles (LV, up to 6 tons) increased worldwide by 10.1% to 89.3 million LV. On the one hand, the previous year’s basis for comparison was very weak, while on the other, the availability of primary products improved, allowing production to be ramped up. According to GD, global production rose to 90.7 million units (+10.1%). The production of vehicles with classic combustion engines fell slightly (-1.0%), whereas vehicles with alternative drive systems boomed. The production of plug-in hybrids (PHEV) and pure battery electric vehicles (BEV) was increased significantly. Their combined global production volume grew by 37.8% to 14.5 million units (PHEV + BEV). The global market for commercial vehicles (commercial vehicles, trucks + buses) was also on the upswing in the reporting year 2023. This was evident in Europe (+12.8%), North America (+7.3%) and China (+36.5%), among others, where production was ramped up considerably in some cases. In contrast, Brazil’s commercial vehicle manufacturers recorded heavy losses (-38.7%) according to GD.

According to the ACEA (Association des Constructeurs Européens d’Automobiles), demand in Europe (EU + EFTA + UK) rose by a strong 13.7% to 12.8 million cars in 2023. Despite this, sales in Europe were still almost a fifth lower than in the pre-crisis year of 2019. The volume markets of the UK, France, Italy and Spain grew at rates of around 16% to 19%. In Germany, the largest single market, sales growth was somewhat more subdued (+7.3%). Across Europe, sales of vehicles with petrol combustion engines rose by 10.7%, while demand for diesel cars continued to shrink (-6.4%). As a result, the overall share of sales of vehicles with classic combustion engines in Europe fell from 51% to 48%. In contrast, the market for electric vehicles has grown significantly (pure BEV +28.2%, hybrid vehicles +19.7%). Supported by buoyant demand in the domestic and export markets and more stable supply chains, Europe's automotive industry increased its passenger car output: Production rose by 13.7% to 18.1 million units in 2023. In addition, Europe’s commercial vehicle market has seen a double-digit recovery from the previous year’s decline. Sales of trucks and buses rose by 22.9% in 2023 and commercial vehicle production increased by 12.8% – in Germany by as much as 16.6%.

Construction industry mixed in 2023, rise in interest rates intensifies downturn in residential construction

Asia’s construction industry developed heterogeneously in 2023 as a result of the global economic slowdown, high inflation and predominantly higher interest rates. While Indonesia’s construction sector remained in crisis mode, Singapore recorded strong growth. India’s construction industry has grown strongly, driven by urbanization. In contrast, China was unable to overcome the crisis in the construction industry. Building construction there shrank by 9.6% in nominal terms, while residential construction fell by 9.3%. In contrast, investments in the water industry rose by 7.6%. Europe's construction industry entered an accelerated downturn in 2023. Developments in residential construction were the main driver. The high interest rates and construction prices had a direct negative impact here. According to the Euroconstruct industry network (including the ifo Institute), renovations of existing buildings also declined. While new construction of other buildings stagnated, civil engineering supported the sector due to government investment. According to Euroconstruct, European construction output shrank by 1.7% in real terms. However, a country comparison shows a mixed picture: In Scandinavia, the decline was double-digit in some cases. In addition, construction activity declined in Austria, France, Italy, the UK and Switzerland, whereas construction activity in Spain and Portugal was on the upswing.

Germany's construction sector continued its negative trend in 2023 with an economic decline in construction investment of 2.1% in real terms (2022: -1.8%). Initially, a high level of existing orders provided support, but new business in residential construction was very weak. At the same time, cancellations are reaching new records. This was due to the sharp rise in interest rates and construction prices. After many years of strong growth, residential construction slipped into a deep crisis in 2023. In contrast, commercial construction was only slightly down in 2023 and public construction bucked the trend. According to the analysis by the German Institute for Economic Research (DIW), the construction volume increased by 6.1% in nominal terms, but excluding price increases (+7.1%), a contraction of 1.1% (2022: -2.2%) was observed. New residential construction fell disproportionately by 5.8% in real terms (2022: -5.2%). The area of extensions and conversions as well as the modernization and refurbishment of existing buildings, which together account for around 70% of the construction volume, declined slightly by -0.7% in real terms.

US construction industry showing growth for the most part in 2023 despite high interest rates, renewed brisk investment in the water business

In the USA, the construction industry remained on the upswing in 2023 despite the rise in interest rates. Measured in terms of expenditure volume, construction output rose by 7.0% thanks to high public infrastructure investment and as a result of lively investment in commercial construction. The massively subsidized investments in renewable energies and the construction of semiconductor factories in particular are likely to have had a positive impact here. Although the financing environment continued to deteriorate due to the interest rate trend, multi-family house construction continued to grow. Private single-family house construction, on the other hand, plummeted. According to official data, the decline amounted to 13.5%. This was due to high inflation and higher interest rates, which led to an immediate slump in demand. According to calculations by the industry experts at FMI, investments in the expansion, conversion and renovation of apartments also fell by 4%. Investments in the expansion of the US water supply, most of which were made by the government, increased by a substantial 17% overall.

According to industry experts at the Harvard Center of Joint Housing Studies (Remodeling LIRA Index), spending on repair and renovation work, which is another key driver of NDS product sales, rose by 2.2% in fiscal year 2023. The annual growth rate in the area of remodeling decreased over the course of the year as project backlogs decreased and HELOC (Home Equity Line of Credit) interest rates increased. By contrast, construction activity in the commercial sector, which includes office, retail and lodging buildings, increased by 12%. This positive development was mainly supported by steady infrastructure investment. Although the commercial sector accounts for a smaller share of NDS revenues, it is an important growth market which still lags behind the residential market in terms of its current size, however.

Legal and regulatory influencing factors

As part of the international orientation of its business and against the background of its acquisition strategy, NORMA Group is obliged to comply with various legal and tax regulations. Product safety and product liability laws, construction, environmental and employment law requirements as well as foreign trade and patent law all play a role here. RISK AND OPPORTUNITY REPORT

Due to the growing water management business and the increasing importance of this strategic business unit, various regulatory initiatives and government measures aimed at improving the supply of water to the population have gained considerable influence for NORMA Group.

NORMA Group’s product strategy is also influenced by the growing density of regulations in environmental law and the current structural change in the automotive industry, in which the focus is shifting to lower-emission drive technologies. New regulations on emissions and fleet management provisions, as well as the strong trend toward

hybrid and fully electric drive models, have a positive impact on NORMA Group’s business. After all, the increasing complexity of systems in vehicles – due to downsizing or hybrid vehicles, for example – also increases the number of interfaces and thus the demand for reliable joining technology. In addition, the increasing electrification of the automotive industry presents OEMs with new challenges and opens up new opportunities and business fields for NORMA Group, especially in the area of thermal management. RESEARCH AND DEVELOPMENT