Has the rich man of Europe caught a cold?
This week we have seen weaker than expected industrial production and export figures from Germany, prompting concerns about the ability of the eurozone economy to recover.
Germany has always been one of the strongest economies in the wider eurozone.
It has the highest GDP per capita of any European country, 24.5% higher than the European Union average last year.
With the eurozone sovereign debt crisis still unresolved, economists and investors have been relying on Germany to help drag the wider European economy out of its hole.
Do these new economic figures represent a bump in the road?
Paras Anand, Head of European Equities at Fidelity Worldwide Investment, has explained in a briefing note for advisers that short term concerns for the German economy could be missing the bigger picture.
“The recent performance of European shares has been driven in part by increasing concerns not just about the shape of the recovery but the fear that we may once again slip into recession.
“This perception has been reinforced by the weak data that has been published by Germany over the last week which is the economy most strategists were optimistic on.”
He goes on to explain that focusing on short term economic data risks missing the medium term recovery story for Germany, the broader European economy and also corporate earnings across Europe.
“Whist there is clearly some softening of demand in key export markets, there is the risk that investors miss the broadening mix of economic growth in Germany in particular where private consumption is a growing component of GDP.
“Additionally, the weakening euro is likely to be supportive for much of the corporate sector, not simply in terms of a translational impact on reported earnings but more fundamentally in terms of the relative competitive positioning of European companies versus their Global peers.
“Whilst the short term response is understandable, it is possible that the bigger picture is being missed.
“There is the risk that investors miss the broadening mix of economic growth in Germany where private consumption and increasing exports are a growing component of GDP.
“Retail sales and consumption continued to grow over the summer and all components for disposable income, such as real wage growth and employment forecasts, are pointing in the right direction.
“In contrast to market sentiment the German consumer has been the key driver for the economy and is expected to remain the focal pillar of strength.
“The temporary interruption from the geopolitical issues around the Ukraine has created short term nervousness in the export market.
“This should not mask the potential of German companies and their much larger export diversification into the structurally growing parts of the world.”
It will be interesting to see how the economic picture develops in Germany and in the wider European economy over the next few months and years.
With the IMA Europe sector showing an average loss of 6.54% over the past six months, investors will be hoping for better news, particularly in respect of corporate earnings which should drive markets to a great extent than economic data.
Photo: Nico Trinkhaus – Dresden Photos
