Germany is heading for turbulence

Angela Merkel © Alamy
Victory for Merkel – now she must build a colourful coalition

It was a classic case of “buy the rumour, sell the fact”. German stocks rose in September as Chancellor Angela Merkel’s centre-right CDU party looked on course to secure a fourth term in office. But once she had won, they slipped. The CDU undershot expectations, implying a period of “unstable government”, says Olaf Storbeck on Breakingviews. Merkel will have to govern with the free-market Liberals (FDP) and the leftist Greens. “The colourful coalition’s life expectancy is open to question.”

But while the FDP’s euroscepticism could thwart France’s plans for further eurozone integration, the three-party coalition may give Germany the kick it needs, says The Economist’s Kaffeeklatsch blog. The Greens want “progress towards electric cars and renewable energy”; the FDP insists on cutting red tape.

Even if the coalition lasts, however, the long-term outlook is discouraging, says Ambrose Evans-Pritchard in The Daily Telegraph. Germany faces a Japan-style demographic squeeze. The workforce has already “flattened” and is set to shrink by 200,000 a year early next decade “under any plausible scenario for immigration”. What’s more, Germany’s industry “may have invented the proverbial spark plug but has been left behind by the information…. revolution”.

Broadband speed is behind Turkey’s. Investment in “outdated” infrastructure is lacklustre. The car industry appears to have snoozed through the advent of the electric car. China’s voracious appetite for German machine tools and capital goods is ebbing. China is also moving up the “technology ladder” and starting to compete with Germany in some export markets. The “German economic super cycle”, says Evans-Pritchard, is over.

For now, however, the rally in the Dax has room to run. Its 30 constituents earn 70% of their revenues overseas, reflecting the economy’s skew towards exports. With global growth at a five-year high, and demand in the eurozone finally on the rise, says Ulf Sommer in Handelsblatt, it’s no wonder Dax operating profits jumped by a third in the second quarter, reaching a new quarterly record of €39bn. Turnover reached an all-time high of €344bn.

The mid-caps, which like their British counterparts have more domestic exposure, are doing “particularly well, with superior growth and profitability”, as Benjardin Gartner of Union Investment told the Financial Times. German GDP growth is at a three-year high while global growth has risen. Throw in still-reasonable valuations, and the bull market won’t end just yet.