The German economy is going through a challenging period. GDP growth has fallen behind the rest of Europe and the US in recent years amid high energy prices and weakness in Chinese demand, critically in the Automotive industry. Not limited to weakness in Chinese demand, but strong competition from the Chinese auto makers is punching through to take market share.The auto industry is of utmost importance for Germany, and the outlook for that industry is clearly challenging.
The Chinese are a vital trading partner for the Germans but there are signs that some headwinds facing German industry may begin to abate.

The Challenges:

•  the past reliance on Russian natural gas
•  the economy’s dependence on China trade.
• a lack of public infrastructure investment in the country
• over regulations with respect to digitalization when compared to other advanced economies.

German industry is highly concerned. There is a long path ahead to any recovery. Real GDP is unchanged since 2019. Compare that to the rest of the developed world: The euro area is up 5%, and in the US over the same period GDP is up 9%.

The Opportunities:

It’s reasonable to expect some German corporates will strive to reduce their dependence on China and diversify their export markets and supply chains. But this will take time. Meanwhile the following points hold true:

• Germany remains a stable and attractive place to do business.
• growth in green projects in Germany will accelerate (such as Hydrogen infrastructure)
• growth in digital projects in Germany will accelerate
• there is a growing opportunity for Germany to develop startups in artificial intelligence infrastructure, in order to better retain tech talent.

Tesla for example helps to prove that Germany is well placed to lead the green transition in Europe. The company decided to build — and now expand — its European Gigafactory near Berlin in part to take advantage of the high local skill levels and the pan-regional supply chain.

Hydrogen infrastructure

Another positive is that up to €160 billion ($175 billion) in the German federal budget is earmarked for hydrogen infrastructure, according to The Economist Intelligence Unit. This has the potential to future-proof Germany’s energy intensive industries, which previously relied on cheap natural gas imports.

Amid the economic challenges, how do you explain the rise in Germany’s DAX index ?

It’s quite interesting. The DAX Index is up more than 17% approx. year-to-date in Oct. 2024, driven by the companies shown in the figure below. The DAX has outperformed France’s CAC 40 also. It’s resilient because it’s not strongly tied to the German economy. Only 18% of sales of DAX companies are made in Germany, according to Goldman Sachs Research.