“Germany is struggling,” say Kevin Fletcher, Harri Kemp and Galen Sher in an IMF blog. The world’s third-largest economy was the only G7 member to contract last year and looks set to be the group’s slowest-growing economy again this year.
Still, the idea that an economic model built on manufacturing and cheap Russian gas is “irreparably broken” is overstating things. Wholesale gas prices have now returned to 2018 levels. The chemicals, metals and paper industries were hit hard by the energy crisis, but they only account for 4% of the economy. Electric vehicle (EV) exports rose 60% last year – VW and BMW alone account for over 10% of global EV sales.
Germany's economy
Germany is still running a trade surplus equivalent to 4.3% of GDP – above the average of the last two decades and hardly the sign of a declining industrial power. While industries like chemicals decline, high-value-added activities – especially in research and development – aren’t going anywhere, Robin Winkler of Deutsche Bank tells Jonathan Packroff for Euractiv.
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That said, a “second year of near-recession” is taking its toll, says Packroff. Insolvencies rose 41% in the first half of the year, an unusual trend in a country that rebounded quickly from shocks such as the 2008 crisis. Things should improve as the global trade cycle turns, says Martin Wolf in the Financial Times. But deeper structural problems are becoming a source of concern.
The ageing population will see growth in the German labour force lag other G7 members for the rest of this decade. Deglobalisation raises acute questions for Germany’s export-based economic model and the country is woefully behind in digitalisation. In the UK we complain about creaking infrastructure because public investment has been a measly 3% of GDP in recent years – but in Germany it has been even lower, at 2.5%.
Germany's stock market
Germany’s stock market lacks “breadth” compared with European peers – smaller, family-owned companies tend not to list, leaving Frankfurt the preserve of large-cap multinationals, says Jan Schildbach in a Deutsche Bank Research note. Dax-listed companies earn more than 80% of revenues outside Germany.
But for all the gloom, investors should remember that “European equity performance has been far better than economic performance”. On a total return basis (including dividends), the Dax has returned nearly 6% a year since early 2007, beating the UK and French markets (both 5.5%) over the same period.
That’s thanks to Germany’s slightly higher weighting towards the technology sector. Since 2013, German initial public offerings (IPOs) have raised the most capital of any European market except for London. Often maligned, German stocks are arguably Europe’s “hidden champion”.
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