German Elections - More Of The Same?

Recovery continues

For investors, the focus remains on the strength of the European economy and the outlook for corporate earnings. Business and consumer confidence as well as economic growth have picked up in Europe this year. The continent’s economic recovery has been led by Germany since the financial crisis. Exports were boosted by a pick up in global growth, in the US and China at first, and now in other parts of Europe. Recent statistics are positive. German GDP growth in the second quarter stood at 2.1% year on year, driven by domestic consumption and manufacturing. Unemployment has fallen to 5.7%, the lowest since reunification. Bank lending continues to grow.

Aided by the labour market reforms of Chancellor Schroder and by entering the Euro at a competitive exchange rate, Germany’s manufacturing sector underpins its exports with vehicles, machinery equipment and electrical products leading the way. The importance of the car industry is well known. It employs over 800,000 people directly and 500,000 indirectly, and represents around 17% of Germany’s exports. But Germany’s manufacturing strength does not just lie with its global leaders.

Mittelstand typically are medium sized companies with sales of up to €50m, employing up to 500 people, with strong global market positions in niche areas. They are characterised by being family owned and committed to apprenticeships and training. With its reform agenda looking to boost employment and exports, the new French government recognises that France is underrepresented in this size of business in contrast to Germany.

Twin Surpluses

The recovery means that Germany is now running a budget surplus. This stood at €18.3bn in the first half of this year, the second highest ever, due to rising tax receipts. The favourable fiscal position may allow any new government to address social and regional inequalities, particularly in the former GDR, that have been raised during this election campaign. An ageing population is another long term challenge for the country. Over 20% of the population are over 65 years old with only Japan and Italy having a higher proportion, according to a recent study by Deloitte.

Germany is also operating a current account surplus of over 8% of GDP, reflecting that it has the highest trade surplus of any country with the rest of the world (over $300bn at the end of 2016). This has certainly attracted President Trump’s protectionist instincts. Given the divergent performances within Eurozone economies since the financial crisis, there is a belief that the German economy should focus less on savings and exports and more on domestic consumption and investment, particularly on the country’s infrastructure. This would assist addressing the global imbalances.

Investor concerns and opportunities

Once the votes have been counted, the new government will have a full political agenda both domestically and internationally.

With inflationary pressures still subdued in the Eurozone, the ECB looks set to remain cautious in reining in its bond purchasing programme.

As the last year has shown, predicting election results and the reaction of markets to them is difficult.  For our clients, we will continue to invest in Europe for the long term with fund managers who can identify outstanding companies that can benefit from an improving European and global economy, however uncertain and fluid the political background. We also select direct European equities in areas as diverse as chemicals companies and tyre manufacturers, where we see good growth opportunities and sustainability of margins.