Germany is in recession both politically and economically but that may not matter for its stocks
The German economy contracted by 0.3% in 2023, marking it as the poorest performing economy in Europe for that year. Inflation peaked around 9% at the end of 2022, and gradually decreased to 3.2% in November 2023, before slightly rising to 3.7% by the year's end. Contributing to recent economic concerns were nationwide train worker strikes and farmer protests against fuel price increases. Projections for 2024 indicate a modest economic growth rate of 0.3% for Germany's economy, a significant reduction from previous forecasts. This trend suggests continued economic challenges for the country.
In 2023, the only notable positive development was the gradual return of monthly trade surpluses to levels seen before the Russian invasion, although this was tempered by reduced imports due to high prices and exports facing difficulties, albeit to a lesser extent.
Politically, Germany's coalition government has shown increasing weaknesses over time. A budget crisis ensued following a court ruling against certain government expenditures, and widespread strikes and farmer protests have led to a decline in the coalition's popularity. The rise of far-right parties in neighboring countries, such as the Netherlands, has influenced German politics, particularly with discussions around the potential banning of the far-right Alternative for Germany (AfD) party. However, any moves to ban AfD might inadvertently boost its popularity. Concerns have been raised over the party's secret meetings and plans regarding the deportation of those deemed not sufficiently assimilated, yet the current administration appears constrained in its ability to act against the AfD.
Surprisingly, German stocks performed well in 2023 despite these economic and political challenges, rising over 20% in dollar terms and nearing all-time highs. German stocks, with a forward-looking price-to-earnings ratio of around 11 (compared to the S&P 500's 19x), remain relatively inexpensive compared to their U.S. counterparts. However, earnings revisions have plateaued since June.
The monthly trade data from Germany could serve as a key indicator of the health of German companies, with current trends seeming to favor them. The performance of German stocks relative to the S&P 500 may continue to be on par or even favorable until the U.S. election results in November, and what happens after the U.S. election is anybody’s guess. If you are invested in German stocks or planning to - keep an close eye to monthly trade data.
