Economy Still Can’t Catch A Break

Whichever way you look at things Germany’s economy is a mess.

The German Federal government just confirmed that the economy has now been in recession for three straight quarters through to the end of June. And that doesn’t even take into account the current situation nor the likely future for the country.

“We suspect that household and government consumption will continue be very weak and think investment will contract,” states a recent report from London-based financial consulting company Capital Economics.

Already the data shows zero growth since the end of the third quarter of 2022, according to financial website TradingEconomics. And according to Capital Economics the cumulative drop is 0.5%,

While that’s not a huge drop, it isn’t good. While the U.S. is seen as the world’s engine of growth, so when it stalls most other places suffer.

Similar is true for the European Union when Germany, by far the largest economy in Europe, has a setback. The other countries in Europe take a hit, with the weaker ones, such as Greece, being disproportionately hurt. In other words, a 0.5% drop in German GDP may have a far larger negative impact on other European economies that are fragile.

Worse still, Germany’s economic mess is likely to continue for another half year, according to Capital Eocnomics. “We are comfortable with our below-consensus forecast that the economy will shrink further in both Q3 and Q4,” the recent Capital report states. In other words, Capital forecasts that Germany’s recession will last five quarters, least.

Currently, things are looking as bleak as they were during the COVID-19 pandemic and associated government lockdowns. The Ifo Current Conditions indicator, which measures the state of the business sector, registered 89 in August its lowest level since August 2020, according to data from TradingEconomics.

That comparison is a pretty bad reading given that Germany’s vast manufacturing base was effectively crippled by the lockdowns at home and the interruption of supply chains across the globe including in China.

The current situation may even be worse as it isn’t limited to certain sectors.

“The sectoral breakdown shows that the downturn is broad-based, encompassing all the major sectors i.e. manufacturing, services, retail and construction, the Capital report states.

At least part of the country’s poor performance has to be blamed on its reckless energy policy which relied heavily on imports of cheap natural gas from Russia and a premature decision to shift to renewable energy when the infrastructure wasn’t ready.

While the German people and the businesses based there are suffering, so are investors.

The iShares MSCI Germany exchange-traded fund (EWG
EWG
), which tracks a basket of German stocks has moved sideways since January 12, gaining a mere 1.1% (excluding dividends) from that date through to August 28. That compares to 11.7% gains for the S&P 500 over the same period, according to data from Yahoo. Again the returns excluded dividends.

So should investors be wary? Maybe not. European stocks tend to have higher dividends than those in the U.S. and they trade a a far lower forward price earnings ratio, typically. For instance, Europe’s stocks on average have a multiple of around 12, while those in the U.S. cost a relatively frothy 19 times future earnings, according to analysis by Yardeni Research.

Still, Germany’s government would do well to gets its energy policy house in order as soon as possible so the country isn’t dependent on getting fuel from its foes.