IT was a surprise for some that German gross domestic product (GDP) growth dropped to zero percent in the second quarter. At Lundgreen’s, we were not surprised — this is not to say “look, we were right” as nobody in the financial markets gets it right all the time. The key is that we have pointed at underlying weak development in the German economy since before the Covid-19 crisis. We argue that the macro problems that are now becoming obvious in Germany have been developing for several years. It makes the swamp much worse than what is priced in the stock market by the investors.
Back in the first quarter of 2020 when the Covid-19 pandemic exploded, German unemployment was at a record low but GDP growth was moving very close down toward zero. At the time it was a situation where all alarm bells should have been ringing. Nobody called for action and all of a sudden, Covid-19 took over and the crisis was not managed away from a deeper economic crisis but instead into it. What followed was Russia’s invasion of Ukraine and the inflation crisis.
We are convinced that many politicians, including the ones in Germany, hoped that multiple economic rescue packages would result in a new post-crisis and relief-spending spree among consumers. That clearly did not happen. Instead, economies — especially the older ones — ended up loaded with public debt and a battered private sector.
Even worse, and also during the crisis years, the underlying wrong structural developments continued in the German economy. We assess that it includes very heavy areas like international competitiveness, over-dependence on business segments with very limited growth potential and a non-flexible labor market.
Where is this leading for the country and investors? We fear that the direction of the German economy remains in rear gear. In general, politics and politicians take up more space in the economies instead of creating healthy frames for the private sector and investors. It ends up being outspoken in Germany with a dysfunctional government that simply does not get its internal cooperation to work.
Basically, it is the same problem as the two previous governments in Germany, which makes for a very long period with missing reforms that could keep the economy fit. At the same time, the whole of Asia and other countries like the US continue to move forward and create new business segments that progress forward very fast.
This once unbeatable strong economy is living on a hope instead of having a strong master plan. Germany hosted the world championship in football this summer where an economic headline was that the event could add 0.1 percent to GDP growth in the third quarter. If that is the case, then yes, hope is in football.
Lately, a famous shipyard in Germany was bailed out for 2.5 billion euros ($2.75 billion), though we do not expect the shipyard to become competitive at any time unless the German labor market is reformed significantly. Earlier this year, a new battery park also got enormous amounts of money in subsidies if they decided to place the facility in Germany. It was sold as a high-tech company and created a few hundred new jobs.
In total, it all looks like panic is rising on the horizon. Panic repair initiatives have been seen in other countries before, precisely when governments have not done a proper job of keeping the economy healthy.
So far this year, the German stock market is up by around 10 percent, which of course represents that leading German companies are strong. Particularly, we argue that Wall Street lifting the German stock markets is dangerous. We fully reckon that the leading German corporations are truly global, but still the German home market also has an importance. In total, we argue that the hopeless outlook for the German economy is not priced in the stock market, meaning we see a significant risk on the downside for German stocks for the rest of this year.
Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Peter is an international columnist and speaker on topics about the global financial markets.
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