While the perception of many is that German is an export-driven market, the German government has been keen to highlight how important domestic growth is to the nation.
A preliminary estimate from Germany’s Federal Statistics Office reported annual growth of 0.4%, with household consumption rising by a price-adjusted 0.9% and government spending up 1.1%. The balance of trade made a negative contribution, with German exports of goods and services up 0.6% on the previous year on a price-adjusted basis, while imports increased by 1.3%.
Shaking off recession
Germany’s export industries are still shaking off the effects of the recession across Europe, but Rob Smith, manager of the Barings German Growth Trust, cautions on reading too much into these figures.
He did not have a particular figure in mind for German GDP, and said he was happy as long as it was in positive territory.
“When it comes to Germany, given the huge trade flows that influence the GDP numbers, it would not be advisable to extrapolate a trend from just a couple of quarters. All other things being equal, GDP will be negatively influenced by an increase in imports exceeding the movement in exports, which is what we have seen in the last two quarters. This has resulted in an overall negative drag effect for the year as a whole.”
“Given that Germany imports many raw materials before adding value and then exporting, it is just as likely that in the current quarter we will now see an increase in exports that exceeds the movement in imports and thus produces a GDP number ahead of expectations,” said Smith.
“You can have quite a big swing factor [between imports and exports]. Expensive complex bits of equipment can have long lead times so things can fluctuate enormously.”
Car boom
In terms of sectors, Smith remains overweight autos.
“This is largely because the US market is still in recovery and the Chinese market actually accelerated in the last quarter. Car sales in Europe are reaching a bit of a rock bottom level, which bodes well for another good earnings performance from the OEMs and component suppliers.”
In terms of size, Smith said he is seeing better opportunities further down the market cap scale.
“Everyone around Europe should be rejoicing about the consumption number,” said Smith. That will help the periphery. For investors from a wider European perspective, last year everyone expected the periphery to outperform and Germany to be the laggard but that wasn’t the case. This year if there are any particular European markets with higher domestic exposure they might do better than Germany, but from an overall European standpoint you have to be a bit worried about France dragging things down. I think the German market will hold up against the rest of Europe, especially if Chinese consumption continues and with things going on in the US. Exports are a big driver of corporate earnings.”
