“The once seemingly unstoppable German economy had the slowest growth of any eurozone country except Italy at the end of 2018,” says Jack Ewing in The New York Times. Last year, Europe’s largest economy only narrowly avoided a recession. Its GDP growth was below the eurozone’s average at just 1.4% in 2018, down from 2.2% in 2017. The slowdown has resulted from Germany’s reliance on what was once its biggest strength: its exports.
“Germany is more deeply entwined with the global economy than perhaps any other country,” as Olaf Scholz, Germany’s finance minister, told the Financial Times. Exports account for 47% of German GDP, according to World Bank data. This compares with 31% in the UK and the US’s 12%. As The Economist notes, Germany’s talent for producing goods that are desired by emerging economies – especially China – propped up its recovery after the financial crisis. Yet exports are also its Achilles heel, leaving it particularly vulnerable to a global slowdown.
It’s not just about weak demand in China
In particular, cars and car parts make up 15% of Germany’s exports. In January, Volkswagen reported a 3.4% drop in sales to China. Components manufacturer Continental also noted decreasing demand. Last year China introduced new emissions standards, an area where Germany hasn’t shown itself in the best light. However, Andrew Kenningham of Capital Economics argues that while China is part of the story, “Germany’s exports are quite diversified”. Sales to China are equivalent to just 2.8% of GDP.
Low water levels in the Rhine have also hit the shipment of some German exports, which is clearly a temporary issue. What’s more concerning is that German consumers are spending less, despite solid wage growth, low unemployment, and ultra-low interest rates. Perhaps they are hunkering down for a recession, or maybe it’s a result of the nation’s ageing population saving for retirement. “Either way, they are unlikely to propel growth this year.”
By the end of last year, the troubles facing the German economy were being reflected in stockmarkets. In the last three months of 2018 the German blue-chip index, the Dax 30, fell by 16%, one of the weakest global performers in a notably bad period. But since the start of this year, the Dax has staged a rally, rebounding sharply. “The bad economic news seems to be priced in,” Frank Geilfuss of Löbbecke bank tells Handelsblatt. “Now, investors are hoping for the silver lining.” Exports “won’t be in free fall forever, and consumers’ spending also ought to pick up” given solid fundamentals, agrees Claus Vistesen of Pantheon Macroeconomics.
The German market now trades on around 12.1 times earnings, according to Yardeni Research – similar to the UK and Japan. What’s more, Commerzbank reckons €38bn will be handed out in dividends by Dax companies this year, up 3% on 2018. It’s certainly possible that the German economy hasn’t yet seen the worst. But investors looking for good-value stocks should pay attention.