Germany’s weak economy has strong foundations

Happy Sunday, readers.

The German elections are just two weeks left. Clouds have become thicker in Europe’s largest economy. After the invasion of Ukraine in Russia, the growing competition from China and the threat of US tariffs now has provoked economic activities. Germany has directly registered negative growth for two years. The nation is sadly claiming its badge as a “sick man in Europe”.

It makes Germany the perfect candidate for free lunch in Sunday’s Counter-Consensus analysis. This week I have studied long -term optimistic cases for the German economy. What I got is here.

First, reports on German industrial degradation are exaggerated. German production is actually amazingly elastic and sticky.

Covid -19 epidemics after the German industry, the power crisis and supply chain disruption. Energy-intensive industries like chemicals and metal contracts. But, IMF notesOther sectors adapted by “Higher Value Transferred to Advated Products and using low intermediate inputs”. Electric vehicles exports increased by 605 percent in 2021. The aircraft has increased electronic and optical production as the aircraft has equipment.

The chart below shows that although German production has decreased, the value is fixed.

In fact, the chronic skills in engineering can be rebuilt in the new growth sector (home and abroad). And although the export of the United States and China can be influenced by increasing trade tensions, the nation remains the dominant industrial power of Europe.

Demand for defense equipment and green technology is increasing throughout the continent. There is a specialty in both Germany, leading Europe for Green Tech (and overall) patents. It is at the top of the developed countries from the United States and China to the IMF index of the comparative benefits of green products. These include highly skilled power plants, intelligent grid designs and Charging technologyThe

Subsequently, the huge powers of the German industry are undercarded by its share market performance. Despite the dark details around its economy, Dax surpassed all other major indicators, including S&P 500 last year.

The FT report The power of Dax in December was characterized by Germany’s own magnificent Seven: SAP, Siemens, Siemens Energy, Allianz, Deutsche Telecom, Rhymetal and Munich Ray. Their focus in the global markets heated them from domestic economic weakness.

Although the market density is worrying, these companies are spread across energy, telecom and insurance-against the S&P 500, which has shown recent instability, risky for artificial intelligence-based correction.

If these companies are strong there is an interesting purchase opportunity for investors. Goldman shutch note that the overall German Equity Market does business in the US Historical Tihasik, despite being adjusted for sector composition.

However, the German corporate power extends beyond these large groups. Its industry is dominated by Mittelstand. These small and medium-sized private enterprises are not like small companies in the United States and UK- they are more experts and innovatives, and often “hidden champions” are branded.

It includes the Germ technique (which produces devices that rotate satellites in space); Ill (a sensor manufacturer); KEARFER ISOLIARTENIC (which produces insulation technology); And Konig and Myer (a musical stand maker).

The chart below shows that the German industry is highly competitive in several growing sectors, well placed to create values. (RInvestigative The BCG and the German Economic Institute have created a ranking method with sub-indicators for the attractiveness of the global market and the attractiveness of the global market, such as global market shares, number of patents, market growth, the intensity of competition and technical maturity.

The German industry produces significant earnings by selling goods and services abroad, which transfer it to demand and geo -politics.

However, Europe has the opportunity to sell more, especially defense and Green Tech (especially the United States returns from the renewable agenda as the trade wars are intensified). The domestic economic environment can also provide a title in the middle term.

German elections are a refreshing opportunity. Perhaps the next Chancellor, Christian Democratic Union leader Fredricich Merge is expected to follow some structural reforms. The politics of the coalition, however, can reduce many of his plans.

Nevertheless, whatever the composition of the German government, the semi-full view of the glass is that marginal improvement can increase productivity (and support the industry).

First, the constitutionally included “Debt O Break” – for which the structural deficit must be at 0.35 percent of GDP – unnecessarily retains public investment. Part of capital expenditure in Germany’s economy is one of the lowest of OECD.

More than half The Germans’ orrow is the limit to overhauling the limit. In fact, the debt brake means that the country has a financial room to increase the cost of productive investment in the country’s cracking road, rail and housing infrastructure.

Public investment is so low, even a little loose of the Debt o brake will also bring a significant difference (Assumption Suggest that Germany can borrow an additional $ 48 billion a year without opposition with EU financial rules).

There are less hanging fruits. Recently allowed reforms gave a fuel Quickly buildout In renewable, the bureaucracy is to underscore a higher return in slashing. In fact, it takes 120 days According to the IMF, to get a business license (more than twice the OECD average). Government digitalization is also behind. For example, exactly 43 percent Personal data in online forms compared to the average of 685 per cent of the EU is the services of pre-purification services.

There are political barriers to increase investment and to ease the burden of red tapes and spending time. Productivity will take time to gain. However, the growing improvement will increase in the low base.

A sticking point is immigration. The working population is rapidly shrinking and Germany suffer from several skills shortages. If migration is politically fulfilled, more investment in riskling initiatives will be needed. The country, however, is taking steps in robotics, which can help free employees for higher value added employment.

The recent economic performance in Germany is incredibly disappointing. It is less likely to visit soon. However, the details of its industrial degradation are overbellown. Downwight titles are hiding the inherent strengths of the country in the production and innovation.

Germany AG (and GMBH) has the ability to pivot the growing sector, including green tech, defense and advanced production. The political class has also aroused the dependence of the old economic model. It hopes that over time, Germany can rise to the waves of creative destruction, especially if policy makers can play a capable role.

Thinking? Rejection? Message me freelunch@ft.com Or at x at @Teepperikh90The

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