Germany: is the gloom overdone?

German factory worker © Getty images
There is a glimmer of hope for Germany’s manufacturers

Germany is “teetering on the brink of recession”, says Tommy Stubbington in The Sunday Times. Industrial orders have seen their sharpest drop in more than two years, defying hopes of a rebound in Europe’s largest economy. So what’s gone wrong? Germany is very dependent on exports, which make up 50% of its GDP. Its economy is powered by the “Mittelstand”, small and medium-sized companies that are often family-run and highly specialised. They supply much of the machinery for the world’s factories. The success of its exports is also Germany’s Achilles heel, as it leaves it vulnerable to slower global growth, especially in China, the main destination of its machinery. The world economy is expected to grow by around 3% this year, the lowest rate since the financial crisis.

Germany’s slowdown has affected the eurozone as a whole. Germany accounts for 29% of eurozone economic activity, “so weakness in Germany drags down the average even if nothing changes anywhere else”, note Andrew Walker and Daniele Palumbo on the BBC.

But the clouds may soon lift. Germany’s unemployment rate is still one of the lowest in the world at 3.1%, which should underpin consumption. In addition, “there is a glimmer of hope for Germany’s beleaguered manufacturers”, says Stubbington. China’s manufacturing sector has returned to growth following stimulus by Beijing comprising infrastructure investments, tax cuts and more bank lending. It’s also interesting to note that the valuation gap between US and German stocks is at a 50-year high, according to one newsletter, while German stocks are highly geared to global growth. With the outlook improving, they look due a bounce.