Headwinds will buffet Germany

Germany has sailed ahead of everyone else in the eurozone since the recession - achieving an annualised GDP growth rate of 6%. Impressive stuff. But that tailwind looks likely to become a headwind before too long.

For years Germany lagged the rest of the eurozone, says Wirtschaftswoche. "Now we're leading it." Analysts reckon that German GDP grew by up to 1.5% in the second quarter alone. That's an annualised rate of 6% twice the figure expected for America this year.

The rebound is being driven by exports, which account for a comparatively hefty 40% of GDP. They jumped by 9.2% month-on-month in May, an annual rate of 22.9%, the strongest growth since the early 1990s. IHS Global Insight expects exports to climb by 10% this year, compared to 6%-7% in other major European economies. Germany's high-end capital goods are especially sought-after in booming emerging economies. There, Germany has a stronger presence than its European rivals, notes Holger Schmieding of Bank of America Merrill Lynch.

With exports and now domestic investment picking up, the labour market is improving. The unemployment rate is at an 18-month low of 7.7%. The missing piece of the puzzle is consumption. So far at least, households have shown little inclination to open their wallets. Retail sales are still 2.4% below last year's recession-hit levels. Consumer confidence is also under its long-term average.

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Wage growth too is slow, due to the previous rise in unemployment. And fiscal tightening is on the way next year. Given all that, the outlook for spending is not encouraging, says Capital Economics.

Domestic demand is "the Achilles' heel of the German recovery", says Carsten Brzeski of ING. The trouble is that the global outlook is deteriorating as company restocking slows and stimulus programmes fade, adds Wirtschaftswoche. The deepening mess in the eurozone periphery doesn't help either, says Lex in the FT. The eurozone still accounts for 45% of Germany's exports.

Like the economy, German stocks are highly geared to global growth. Along with Germany's sound finances, this explains why it has done better than most during the latest market upswing. The DAX index is marginally up on the year, while its French and Italian counterparts are in the red. But with the highest proportion of cyclical stocks in Europe 45% and growth everywhere slowing, it looks likely to struggle over the next few months. The global cycle, says UniCredit Research, "is moving from a tailwind to a headwind for German equities".