The German economy defied global headwinds in 2015, as the combination of expansionary monetary policy and record employment fueled domestic consumption. These forces partially offset a downshift in the country’s exports, which stemmed from waning demand in emerging markets. Moderate growth is expected to continue this year on the strength of consumer spending and the continual shift away from emerging markets to recovering developed nations.[1]
Growing Slightly Above Potential
Germany’s gross domestic product (GDP) expanded 1.7% in 2015 after a gain of 1.6% the year before,[2] official data confirmed in February. That was in-line with the consensus estimate and slightly above the Eurozone average of 1.5%.[3]
“The economic situation in Germany was characterized by solid and continuous growth in 2015,” Germany’s Federal Statistics Office reported in a February 12 press release.[4]
Germany has outperformed the broader Eurozone economy by a wide margin since the financial crisis. According to an economist at ING, the German economy has contracted just three times in 27 quarters through the end of 2015.[5]
Moderate Growth to Continue
Germany’s GDP is forecast to grow 1.7% in 2016, according to separate forecasts by the International Monetary Fund[6] and German government.[7]
A strong labour market fueling consumer spending is expected to be the main catalyst for growth this year. Average wages rose in 2015 and are projected to accelerate a further 2.6% this year. This should lead to a nearly 2% rise in consumer spending in all of 2016, government forecasts show.
The combination of plunging oil prices and rock bottom interest rates are also positive developments for the consumer. Oil prices are projected to remain low throughout 2016. On the interest rate front, the European Central Bank has signaled its readiness to cut the already negative deposit rate even further should Eurozone growth and inflation continue to stall.[8]
Germany’s growth rate is impressive when you consider the context of declining exports. Manufacturing accounts for approximately one quarter of German GDP,[9] making exports a key cog in the economy. With oil prices plumbing nearly 13-year lows and emerging market demand waning, Germany’s export sector has also taken a hit. As a result, the reduction in export demand is expected to know around 0.4% off GDP this year.[10]
Volatility in Store for German Stocks
German stocks have not been spared the ill effects of growing instability in the financial markets. At its lowest point this year, Germany’s DAX Index was down 16% in 2016. Despite this, Deutsche Bank expects a resilient year for German stocks. According to Deutsche Bank Chief Investment Officer Dr. Ulrich Stephan, the DAX could grow 5% in 2016.[11]
The outlook on German stocks depends on a host of factors ranging from ECB stimulus hopes to oil prices and up to entrenched global volatility. While financial experts have lowered their year-end forecasts for major equity indexes,[12] many are confident that the recent selloff that pushed markets in Asia and Europe into bear market territory will ease. One reason is that late-day buying activity has increased since the end of January, a sign that markets may have already bottomed.[13] Another reason is there hasn’t been one underlying catalyst behind the global equities purge, which suggests stocks may be oversold.
However, one major concern for the DAX is the massive selloff in banking shares, which have drawn comparisons to the early days of the financial crisis in 2008. DAX members Deutsche Bank AG and Commerzbank AG have taken massive hits over the past six weeks on growing fears about these banks’ creditworthiness. Deutsche Bank has declined more than 32% this year, while Commerzbank has plunged more nearly 22%.
Outside of the financial sector, a host of German companies have felt the blow-back of a weaker global economy. Automakers BMW AG, Volkswagen AG and Daimler AG have already declined more than 23% this year on weak demand.
The following summary by Bloomberg Business captures the performance of German stocks so far this year.
“While only about a dozen out of 93 equity gauges tracked by Bloomberg have risen this year, Germany stands out for the extent of its losses. After being some of investor’s favorites in 2015, none of the 30 DAX shares rose this year. The gauge closed 27 percent below its April peak on [February 10].”[14]
Conclusions
With employment and consumer spending rising, there’s a lot to be optimistic about in Germany. However, the country’s close ties with emerging markets, especially China, means it stands to lose more than any other nation in the Eurozone. This certainly explains why German stocks have experienced losses that exceed declines in the UK, France and Switzerland by as much as seven percentage points.[15]
The fate of the Eurozone is intricately tied to the performance of Germany. The nation of 80 million accounts for approximately one-third of Eurozone economic output. While the Eurozone economy has shown some signs of progress, peripheral states such as Greece continue to struggle with contraction and even downright recession.
[1] Jana Randow (January 14, 2016). “German Economy Defied 2015 Global Slowdown as Growth Accelerated.” Bloomberg Business.
[2] Jana Randow (January 14, 2016). “German Economy Defied 2015 Global Slowdown as Growth Accelerated.” Bloomberg Business.
[3] Pan Pylas (February 12, 2016). “Eurozone economy ends 2015 with whimper as dark clouds grow. “Canadian Business.
[4] Federal Statistics Office (February 12, 2016). “Gross domestic product increased also in 4th quarter of 2015.” Federal Statistics Office.
[5] “Germany economy ends 2015 on solid note.” DW.
[6] International Monetary Fund (January 2016). “Subdued Demand, Diminished Prospects.” World Economic Outlook.
[7] “German economic forecast cautiously upbeat.” DW.
[8] Financial Times (January 21, 2016). “ECB leaves interest rates on hold.” Financial Times.
[9] The World Bank. Manufacturing, value added (% of GDP).
[10] “German economic forecast cautiously upbeat.” DW.
[11] Deutsche bank tweet at 5:55 AM on 26 Jan 2016.
[12] Akin Oyedele and Bob Bryan (February 15, 2016). “Here’s what 18 Wall Street pros are predicting for the stock market in 2016.” Business Insider.
[13] Chuck Mikolajczak (February 12, 2016). “Late-day buying could be start of turnaround.” Reuters.
[14] Roxana Zaga (February 10, 2016). “Germany’s Slumping DAX Needs More Than a Deutsche Bank Rebound.” Bloomberg Business.
[15] Roxana Zaga (February 10, 2016). “Germany’s Slumping DAX Needs More Than a Deutsche Bank Rebound.” Bloomberg Business.
