The German poor economy has strong foundations

Happy Sunday, readers.

The German elections are only two weeks away. The clouds thickened themselves because of the largest European economy. Increasing energy costs after the Russian invasion of Ukraine, growing competition from China, and now the threat of US tariffs has reduced economic activity. Germany recorded a negative growth for two years. Unfortunately, the nation returns its badge as a “sick man of Europe”.

This makes Germany the perfect candidate for a free lunch at Sunday Analysis of the Counter-Consensus. This week I explored the long -term optimistic case of the German economy. Here’s what I found.

First, reports on the German industrial decline are exaggerated. German production, in fact, is surprisingly resistant and agile.

Disorder of the energy crisis and supply chain after the Coid-19 pandemia hit the German industry. Energy intense industries such as chemicals and metal contracted. But, IMF notesOther sectors adapted to “switching to products with value added and using less intermediate entrances.” Electric vehicles export increased 60 percent in 2023. Electronic and optical production also picked up as well as airlines.

The chart below shows that, although German production production has fallen, the added value has remained stable.

Indeed, Germany long -standing expertise in engineering can be diverted to new growth sectors (at home and abroad). And although exports to the US and China can affect growing trade tension, the nation remains a dominant industrial force in Europe.

Demand for defense equipment and green technologies is growing on the entire continent. Germany has specialism in both, which leads Europe for patents in Green Tech (and overall). It is also located on top among developed countries, significantly above the US -ai China, in the comparative advantage index of the IMF Green Rob. These include very effective power plants, intelligent network design and Charging technology.

Then the huge forces of the German industry are emphasized by the performance of his stock market. Despite the narrative of the darkness around its economy, Dax surpassed all other main indexes last year – including the S&P 500 -.

AND FT reported In December that the Dax -extent was founded by the German magnificent seven: SAP, Siemens, Siemens Energy, Allianz, Deutsche Telekom, Rheinmetall and Munich Re. Their focus in global markets isolated them from domestic economic weaknesses.

Although the concentration of the market is worrying, these companies are expanded by energy, telecommunications and insurance-a difference from the S&P 500, which, as she recently showed volatility, susceptible to artificial intelligence corrections.

If these companies remain strong, there is an attractive opportunity for investors to buy. Goldman Sachs notes that the entire German capital market is traded with a historic discount in the US, even if the composition of the sector is adapted.

But the German corporate power extends beyond these large groups. Its industry is dominated by Mittelstand. These small and medium-sized private companies are not unlike smaller companies in the US and the UK- they are specialist and innovative, and are often marked “hidden champions”.

They include Zarm Technik (which makes devices that rotate satellites in space); Sick (sensor manufacturer); Kaefer Isoliertechnik (which makes the technology of isolation); and König & Meyer (producer of music stands).

The chart below shows that the German industry is well set up to create values, very competitive in numerous growth sectors. (RResearchers At the BCG and the German Economic Institute, they have developed a methodology for ranking with sub-indifferences for the competitiveness and attraction of the global market, such as the global market share, number of patents, market growth, competition intensity and technology.)

The German industry generates significant revenues by selling goods and services abroad, which exposes it to the displacement of demand and geopolitics.

However, there are options for sale more Europe, especially in defense and green technology (especially since the trade wars are intensified, and now they are withdrawing from the agenda of renewable sources). The domestic economic environment could provide wind in the medium term.

German choices are an opportunity for refreshment. The next chancellor, Friedrich Merz, the leader of the Christian Democratic Union, is expected to continue some structural reforms. The coalition policy, however, could dilute many of his plans.

However, regardless of the composition of the German government, the glass semi-lodged perspective is that even marginal improvements in politics can increase the growth of productivity (and support industrial agility).

First, the constitutionally closed “long brake” – which requires the structural deficit to remain at 0.35 percent of GDP – unnecessarily reduces public investments. The share of capital consumption in the German economy is one of the lowest in OECD.

More than half Germans support the overhaul of borrowing limit. Indeed, the debt brake means that the country has a fiscal room to increase consumption on productive investments in its creaking road, rail and housing infrastructure.

With such low public investments, even a slight looping of the brake would make a significant difference (assessment They suggest that Germany could also borrow an additional € 48 billion a year, or about 1.2 percent of GDP, without a conflict with EU fiscal rules).

There are more fruits. Recent reforms permit have encouraged a Fast construction In renewable sources, undergoing high yields to reduce bureaucracy. Indeed, it is necessary 120 days To get a business license (more than double average OECD), according to the IMF. Government digitalization is also lagging behind. For example, just 43 percent The service before filling out personal data on network patterns compared to an EU average of 68 percent.

There are political obstacles to overcome to increase investment and facilitate the time and costs of bureaucracy burden. Productivity profit will take time. But even an incremental improvement on a low base would be an increase in growth.

One point for gluing is immigration. The working age population decreases quickly and Germany suffers from a series of skills shortages. If migration remains politically full, the outpatient initiatives will need more investment. The country, however, achieves steps in robotics, which can help free workers for greater employment with value added.

The recent economic effect of Germany is undoubtedly depressed. It is unlikely to turn around soon. But the narrative of his industrial fall is overly overwhelmed. Downholding titles cover up basic forces in production and innovation.

The German AG (and GmbH) has an expertise to turn in growing sectors, including Green Tech, defense and advanced production. The political class also woke up the dependence of the old economic model. This gives hope that over time, Germany could drive a wave of creative destruction, especially if policy creators can play a role.

Thoughts? Refutation? Send me a message on freelunch@ft.com or on x @ @ Teapperikh90.

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