Is the German economy running out of steam

In the UK, we have grown rather used to the idea that the German economy is the largest in Europe, and that it enjoys not just success, but sustained growth.
We have also become accustomed to the habit of thinking that the German automotive industry leads the world in quality engineering.
Both these notions have taken something of a knock just lately.

The German economy is shrinking

The European statistics agency has confirmed the surprising fact that the German economy may have shrunk by 0.3 per cent in the third quarter of 2018. It was the economy’s first quarter-on-quarter fall since 2015.

Germany’s economy grew by 1.1% from July to September, compared with the same quarter of 2017, the Federal Statistics Office said. It suggests that the reason was mainly the result of foreign trade developments. The initial calculations suggest that  there were fewer exports, but more imports in the third quarter than expected. What’s more, the consumption expenditure of German households declined – and perhaps most remarkable of all the suggestion was that some investors do not expect the German economy to bounce back immediately from the third-quarter weakness.

What is going on?

The German economy has many areas of strength, but the most visible is certainly the automotive sector.  Mercedes, VAG –  the Volkswagen group which includes Audi as well as Seat and even Bentley – and BMW are all world-leading brands. All have been tarnished, in some cases unfairly, by the dieselgate debacle, that saw irregularities on emissions tests.

Some diesel cars from the VW group had clearly been installed with engine management software designed to give a false impression of pollution levels in tests.  It sparked a backlash for the group, by extension, the entire German automotive industry and even according to some industry observers, for the entire global diesel market.

The effect has been dramatic enough to contribute to the fall in the performance of the entire economy.

Where does this road lead?

The fall in GDP for Germany suggests that it is over-reliant on the automotive industry. Worldwide, German cars and to a lesser extent vans and commercial vehicles are well regarded because of their build quality and technology. But the technology centred around the diesel engine (itself a German invention of course) may have had its day, at least for cars.

Diesel is losing favour with buyers and legislators alike, and industry experts agree that electrics are coming. Last quarter, for the first time ever, Tesla outsold Mercedes in the crucial US market. The innovative electric powered brand looks set to pass BMW this quarter as well.

Vehicle manufacturers around the world are hurrying to launch electric models. Of course, German makers are no exception. It is possible to buy a hybrid BMW, and even a battery powered Smart. But it looks as though the German lead has been damaged, if not altogether lost.

What next?

While the German economy can still only be described as healthy, issues remain. Exports and consumer spending could both rebound in the coming quarters if car producers come up with ways to recover their lead. There is a high level of consumer confidence, rising wage growth and the possibility of a fall in inflation. They could mean a recovery ahead, although global demand might still be crucial to a return to real growth.

What does this mean for your money?

For those clients who may have funds within their portfolios which are exposed to German stocks, these could seem less appealing than they were. However, the need for Investment diversity, especially in the light of Brexit uncertainties mean it could be a good time to review your portfolio holdings.

To discuss the best way to diversify your holdings is to talk to the Continuum team.

The value of investments can fall as well as rise and you may get back less than you invested.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

Book a free initial consultation

Book an initial consultation with one of our independent financial advisers or call us on 0345 643 0770 if you would like to discuss further.

Sources: – German economy contracts for first time since 2015 – 14th November 2018

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