German factory orders rebounded partially in August, a sign that the country’s crucial manufacturing sector may be stabilizing as it suffers from a global economic slowdown and higher interest rates [2a5a8c90]. Demand increased 3.9%, surpassing economists' expectations. German manufacturers are also grappling with challenges such as the war in Ukraine, an aging workforce, and dependence on China. However, there is an opportunity for the German economy to regain its technological leadership through the green transition. The country's long-term potential growth will depend on how it addresses its structural challenges [2a5a8c90].
German business morale, on the other hand, has shown some improvement but there are concerns about darkening clouds on the horizon. The Ifo institute's confidence barometer, based on a survey of 9,000 companies, rose slightly to 87.3 points [c24afc55]. This indicates a slight increase in confidence among German businesses. However, analysts suggest that this rise in confidence may indicate a bottoming out rather than an imminent rebound in the German economy. The German economy is stabilizing at a low level, and there are still challenges and uncertainties that could impact its future performance [c24afc55].
Germany's economy is struggling to emerge from a downturn in manufacturing, which is weighing on growth overall. Gross domestic product will probably eke out a small gain this year before stronger momentum takes hold in 2025 [1fea439c]. Euro-area private-sector activity hit an eight-month high, with services and stabilizing numbers across most of the region making up for an increasingly dire situation in German manufacturing. Germany sees its faltering economy expanding by just 0.2% this year [1fea439c].
German industrial production rose 1% in January, the first increase in nine months, led by construction. Manufacturing output also saw increases in chemicals, food, and machinery, but carmakers experienced a sharp decline. The overall level of production remains close to the lowest level since 2020, indicating that Germany's manufacturing sector is still struggling. The Bundesbank has warned of a contraction in the first quarter, potentially leading to Germany's first recession since the pandemic [7023e46f].
Germany's service sector has led to a positive economic outlook, with the data for April showing strong expansion in the service sector PMIs for Germany, the UK, and the Eurozone. However, the manufacturing sector has contracted, with new orders and total new business falling. The employment situation in Germany's PMIs for April also showed contrasting fortunes for the service and manufacturing sectors, with the service sector adding employees and the manufacturing sector shedding staff. Inflation pressure appears to be moderating. Germany's economic recovery is dependent on the service sector and consumer spending, while the manufacturing sector remains weak. The stock market has reacted positively to the data, with the Dax leading the way in Europe. The outlook for the euro is positive, but there may be a cap on EUR/USD strength due to lower German bond yields. The immediate resistance for EUR/USD lies at $1.0700. The mid-cap stock index in Germany could outperform the large-cap Dax if the economic recovery continues [70ef3e2e].
Germany’s economic prospects are looking up after two grueling years of near-zero growth. The consumer-led revival, though, papers over enduring industrial weakness for which there’s no quick fix. Data this week signaled the fledgling recovery in Europe’s largest economy is gaining momentum — especially in service sectors like tourism and hospitality. Even as factories remain mired in a slump, the green shoots are being welcomed across the 20-nation euro zone, where Germany was the primary engine of expansion before surging energy costs and wilting Chinese demand turned it into the biggest laggard. An initial verdict on first-quarter gross domestic product is due Tuesday from Destatis, with the Bundesbank recently reversing an earlier call for contraction to now predict growth, albeit modest. On the back of shrinking output in the previous period, rising industrial production and a better performance by construction amid mild winter weather probably buoyed the result. Companies reporting first-quarter results this week began to reflect the better news: Software maker SAP SE foresees record revenue growth in its cloud business, while Adidas AG boosted its profit target. Tempering the scale of Germany’s rebound, however, is its outsized manufacturing sector, whose malaise is now approaching two years, according to S&P Global’s latest poll of purchasing managers. Chemicals giant BASF SE saw earnings decline at the start of 2024, with Chief Executive Officer Martin Brudermueller saying he can’t “confirm a fundamental turnaround” in his industry, which has been weighed down by higher gas prices and limp foreign demand. While it will take time for manufacturers to feel the benefits of looser monetary policy, exports could benefit from firmer global trade this year. Structural worries also loom large. Lowly longer-term GDP forecasts worried Economy Minister Robert Habeck when he presented a meager upgrade to this year’s projection on Wednesday. The government now sees growth of 0.3% — up from 0.2% before. [fad7b6b3].
Germany's economy is expected to catch up with the rest of Europe this year and support equities. The German economy has coped well with recent challenges, and early indicators are pointing to an upswing. The valuation gap between German stocks and the U.S. is expected to shrink. Despite concerns about Germany's decline, some investors still trust the country, as reflected in the low yields on Germany's bonds. The DAX is trading at a record discount to the S&P 500, despite better momentum in Germany and Europe. Germany's economy has faced structural problems, but short-term developments are moderately encouraging. The German consumer is slowly recovering, and GDP growth is expected to pick up. German stocks are relatively cheap compared to their earnings trend, and the DAX has underperformed compared to the S&P 500. The German real estate market is stabilizing, with residential and logistics sectors offering potential. U.S. money market funds have experienced massive inflows, reaching an all-time high. Sustainable bonds offer opportunities for diversification and outperformance. Overall, German equities are expected to outperform the U.S. and narrow the valuation gap in the next 12 months. [27dd4852]
Long-term trends pose challenges to the German economy, but there are signs of a cyclical upswing. Germany's economic growth in Q1 2024 was 0.2%, largely driven by positive contribution from construction. However, new construction orders fell by 17% and property prices continue to fall, suggesting lacklustre demand in the construction sector. On the other hand, German manufacturing appears to have reached its bottom and is poised for a cyclical upturn. Lower energy prices and positive inventory cycle are contributing to the acceleration of German manufacturing. Leading indicators, such as the ifo index of manufacturing business expectations, are also pointing to further improvements. While risks such as a slowdown in the US economy and trade tariffs by China remain, German consumers are starting to recover their confidence. Real wages have grown for three consecutive quarters, lifting real purchasing power. Surveys suggest that consumer spirits are starting to revive, and an increase in consumption is likely in the second half of 2024. Overall, the German economy is slowly falling into place for a cyclical upswing, starting with domestic consumer demand, followed by manufacturing output and construction. [d31b8b06]