Happy Sunday, readers.
The German election is just two weeks away. The clouds have swell over the largest economy in Europe. The growing energy costs after the invasion of Ukraine of Russia, the increase in China’s competition and now the threat of US tariffs has exhausted economic activity. Germany has registered a negative growth for two consecutive years. The nation is sadly claiming its badge as “the sick man of Europe.”
That makes Germany the perfect candidate for free lunch in the counter-contraczenso analysis on Sunday. This week I investigated the long -term optimistic case for the German economy. This is what I found.
First, the reports of the industrial decline in Germany are exaggerated. German manufacturing is, in fact, surprisingly resistant and agile.
The energy crisis and the interruption of the supply chain after the Covid-19 pandemic hit the German industry. Energy intensive industries, such as chemical and metal products, hired. But, the IMF notesOther adapted sectors “changing to higher added value products and using less intermediate inputs.” Exports of electric vehicles increased by 60 percent by 2023. Electronic and optical production has also increased, as well as aircraft machinery.
The table below shows that, although the German manufacturing production has fallen, the added value has remained stable.
In fact, the long -standing experience of Germany in engineering can be reused towards the new growth sectors (at home and abroad). And although exports to the United States and China can be affected by the increase in commercial tensions, the nation remains the dominant industrial force in Europe.
The demand for defense equipment and green technologies is increasing throughout the continent. Germany has a specialty in both, leading Europe for patents in green technology (and in general). It also occupies the first place among developed nations, well above the United States and China, in the comparative advantage index of the IMF in green products. This includes highly efficient energy plants, smart grid design and load technology.
Next, the vast strengths of the German industry are underlined by the performance of their stock market. Despite the narration of the gloom around its economy, the DAX beat all other important indices, including S&P 500, last year.
He FT reported In December, Dax’s force was supported by the magnificent seven of Germany: SAP, Siemens, Siemens Energy, Allianz, Deutsche Telekom, Rheinmetall and Munich Re. Its approach to global markets has isolated them from internal economic weakness.
Although market concentration is a concern, these companies extend between energy, telecommunications and insurance, unlike the S&P 500, which as recent volatility has demonstrated, is vulnerable to corrections based on artificial intelligence.
If these companies remain strong, there is an attractive purchase opportunity for investors. Goldman Sachs points out that the general market for German shares is quoted with a historical discount to the United States, even when adjusted by the composition of the sector.
But the German corporate force extends beyond these large groups. Its industry is dominated by Mittelstand. These small and medium private companies are different from smaller companies in the United States and the United Kingdom: they are more specialized and innovative, they are often qualified as “hidden champions.”
They include Technik zarm (which manufactures devices that rotate satellites in space); Sick (a sensor manufacturer); Kaefer Isoliertechnik (which makes isolation technology); and König & Meyer (a creator of musical stands).
The table below shows that the German industry is well located for the creation of value, being highly competitive in several growth sectors. (RESEARCHERS In BCG and the German Economic Institute developed a classification methodology with subindicators for competitiveness and attractiveness of the global market, such as the global market share, the number of patents, market growth, competition intensity and technological expiration ).
The German industry generates significant income by selling goods and services abroad, which exposes it to changes in demand and geopolitics.
But there are opportunities to sell more to Europe, especially in defense and green technology (particularly as Trade Wars intensifies and the United States withdraws from the renewable energy agenda). The internal economic environment could also provide a wind against in the medium term.
The German choice is an opportunity for an update. The probable Foreign Minister, Friedrich Merz, leader of the Christian Democratic Union is expected to look for some structural reforms. However, coalition policy could dilute many of its plans.
Even so, whatever the composition of the Government of Germany, the full average glass perspective is that even marginal improvements in politics could boost productivity growth (and support industrial agility).
First, the “constitutionally consecrated debt brake” which requires that the structural deficit remain at 0.35 percent of GDP, unnecessarily maintains public investment. The participation of capital spending in the economy of Germany is one of the lowest in the OECD.
More than half of the Germans support the review of the loan limits. In fact, the debt brake means that the country has the Fiscal Chamber to increase the expenditure on productive investments in its crunchy road infrastructure, railroads and housing.
With such low public investment, even a slight looping of the debt brake would make a notable difference (estimates Suggesting that Germany could also borrow 48 billion euros a year, or around 1.2 percent of GDP, without conflict with EU fiscal rules).
There are more low fruits. Recent permits reforms have fed a Fast construction In renewable energies, underlining high returns to the cutting bureaucracy. In fact, it is needed 120 days To obtain a commercial license (more than double the OECD average), according to the IMF. Government digitalization is also behind. For example, alone 43 percent Of the services, the personal data of filling previously in online forms compared to the EU average of 68 percent.
There are political obstacles to overcome to increase investment and relieve the load and cost of bureaucracy. Productivity profits will take time. But even incremental improvements in a low base would increase growth.
A conflict point is immigration. The population of working age is quickly reducing, and Germany suffers from a series of skills scarcity. If migration remains politically tense, the requirement initiatives will need more investment. However, the country is advancing in robotics, which can help free workers for higher added value.
Germany’s recent economic performance has been undeniably depressing. It is unlikely to go around soon. But the narration of its industrial decline is exaggerated. Descending holders are hiding the underlying strengths of the Nation in manufacturing and innovation.
Germany Ag (and GMBH) has the experience of pivoting in growing sectors, even in green technology, defense and advanced manufacturing. The political class has also awakened to the dependencies of the old economic model. This hopes that, over time, Germany can set up the wave of creative destruction, particularly if political leaders can play a qualifying role.
Thoughts? Refutations? Send me a message to freelunch@ft.com or in x @fabuparikh90.
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