Germany’s Economy Is Stuck. But Stocks Are Looking Cheap.
German stocks have stalled this year after a decent 2023. The Global X DAX Germany exchange-traded fund has gained less than 1% year to date, while the S&P 500 index jumped another 5%.
No wonder. Europe’s biggest economy shrank last year, and the Bundesbank just predicted more of the same for the first quarter. Airbus
Expectations for corporate profit increases have cratered from 8% at the start of the year to 1%, says Uwe Hohmann, equity strategist at Metzler Bank in Frankfurt. The government lost 177 billion euros ($191 billion) in spending power when the Constitutional Court ruled last November that it couldn’t repurpose revenue left over from an emergency pandemic fund. Transit strikes are roiling the land of labor-management consensus.
It’s early to say that Germany is returning to the “sick man of Europe” status it occupied two decades ago. But an uneasy stasis could last a while. “Germany will not get out of this stagnation very easily or quickly,” says Carsten Brzeski, chief euro zone economist at Dutch bank ING.
Germany has been a big loser from recent geopolitical fissures. It rocked for most of this century on cheap Russian natural gas feeding industries that sold on to a voracious China. Russia cut off its end entirely after invading Ukraine in 2022. China is buying less and competing more, most notably in automobiles.
“What we are seeing in Germany clearly stems from a world that has changed,” says Matt Gertken, geopolitical strategist at BCA Research.
Germany’s internal fabric isn’t in the best shape to combat these external challenges. Chancellor Olaf Scholz presides over a fractious three-party coalition with approval ratings below 20%. Societal “complacency” runs deeper, Brzeski says.
The country has slipped steadily in World Economic Forum competitiveness rankings, coming in a derisory 22nd for 2023. The mighty automotive complex dozed through the early stages of the electric-vehicle transition. “I remember the auto industry laughing at Tesla, saying this isn’t a car,” Brzeski says.
With government debt around 60% of gross domestic product, half the U.S. level, Germany might benefit from some stimulative deficit spending. But a constitutionally enshrined “debt brake” limits budget gaps to 0.35% of GDP. The two-thirds parliamentary majority to overturn it looks well out of political reach.
Not everything is quite so bad. European natural-gas prices have fallen well below pre-Ukraine War levels, thanks in part to the Scholz government moving fast to replace Russian imports. Energy-intensive industries like chemicals are “thinking twice about leaving the country,” says Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
Employment is at record levels. Real wages are rising a bit as inflation subsides and labor shortages loosen employers’ purse strings.
The biggest listed German companies are more dependent on the global economy in any case. Software giant SAP, machinery colossus Siemens, financial empire Allianz, and jet maker Airbus (AIR.Germany) account for a third of the DAX index among them.
The market is still cheap, at least relative to the U.S. The average price/earnings ratio is 12, a hair under the historical mean of 12.5 and half the S&P 500’s multiple, Hohmann reports.
“We have lots of industrial names with mid-single digit P/Es, which could gain with any acceleration in demand,” he argues.
Writ large, though, Germany looks stuck. Angela Merkel cured the national malaise 20 years ago, loosening the labor market and trimming the welfare state. This time, no turnaround leader is on the horizon—at least not yet.