News ID: 259223
Published: 1116 GMT September 25, 2019

The German paradox — recession now, stimulus, cars and the green economy later

The German paradox — recession now, stimulus, cars and the green economy later

By Mike O'Sullivan*

Compared to many other large economies in the world, Germany has an unusual set of economic problems. Whilst China, Japan and the US are still, just about growing, Germany is now careering towards a recession. Unlike those countries however, Germany has a relatively low amount of government debt and plenty of fiscal space. The trouble is Berlin doesn’t want to avail of these right now.

The Dax index dropped by over one percent as its manufacturing sector PMI (Purchasing Manager’s Index) dropped to a decade extreme of 41.4. The PMI reading for the broad German economy also fell, slipping to 49.1 — the lowest reading in 83 months, suggesting that the fourth biggest economy in the world is in recession.

On Tuesday the influential ifo survey confirmed the poor PMI reading with its expectations component dropping to the lowest level since the global financial crisis.  Historically this measure is a good lead indicator of where German GDP goes. Worryingly, there are signs that Germany’s malaise is now spreading to other economies. France also experienced a deterioration in its lead indicators, and the euro-zone as a whole is now toying with recession. A report from the OECD said as much.

Germany’s weakness is a sign of our times. Of the major European indices the Dax is the most exposed to world trade (15 percent China sales exposure), and the weakness in German macro data tracks the decline in other, cyclical economies like South Korea, and indicators like global capex.

With the German car industry at the epicenter of these trends, Germans might want to blame US President Donald Trump’s trade war for their decline.

Germany is also increasingly a poster child for the view that QE has run out of steam in that it no longer spurs economic growth. Germany’s banks are suffering from negative interest rates and there is a gathering chorus in Germany that QE is inflating house prices and crimping housing affordability so much so that in some cities rent controls and rent discounts have been introduced.

However, Germany is not about to fall apart. Unemployment is low, and importantly, unlike many other nations, Germany has fiscal space to stimulate its economy and is one of the best-behaved developed economies in terms of its debt to GDP ratio (close to 60 percent). Still unlike other countries, there is little urgency on the part of German politicians to come to the rescue of their economy.

One reason for this is a recognition that the weakness in the German economy is centered on the auto industry, and that only a stimulus in China and a resolution to the US/China trade war can resolve this. Another reason is German fiscal prudence, and a realization that fiscal stimulus may have a greater economic and strategic impact in the context of a broader recession.

Then, there is German politics. As the dusk sets on Angela Merkel’s Chancellorship, Germany will, for the first time in over 30 years be left without a dominant political personality. Its political system is fracturing, as highlighted by the rise of both the Green Party and the right wing AfD (Alternativ fur Deutschland). At the same time, Merkel’s successor, AKK (Annegret Kramp Karrenbauer), is increasingly recognized not to have the charisma and ideas of the likes of Emmanuel Macron.

So, this leaves Germany as a structurally robust economy that is cyclically exposed. In this regard it has several points of interest for investors.

First, for Americans looking to play any market rebound on the back of positive trade talks, the Dax and specifically auto companies are highly geared in this respect.

Second, Germany’s economic decline suggests that QE is no longer working and that soon, more broadly markets may give up the QE trade, with a resulting spike in bond yields and volatility. Banks could be a beneficiary.

Third, calls for stimulus in Germany will grow. The most likely areas here are infrastructure — roads, telecoms and rail, and the ‘green economy/green tech’ (Germany is issuing a EUR 50 billion Green Bond).  Given the size of the German economy, these have the ability to become secular trends.

*Mike O'Sullivan is the author of a book called ‘The Levelling’.

The article was taken from


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