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Reflecting on February: Germany avoids recession, but only just

As the German economist avoids entering a technical recession by the skin of its teeth, we look at the impact that slowing growth has had on the country’s equity market and whether we should expect this weakness to persist.

Reflecting on February

What happened?

Data released in February showed that the German economy had narrowly avoided entering a technical recession in the fourth quarter of 2018. A technical recession is defined as two consecutive quarters of negative GDP growth and having contracted by 0.2% in the third quarter, the world’s fourth largest economy remained static in the final three months of 2018, thereby avoiding a recession by the narrowest of margins. Over the entire year, the German economy grew by 1.4%, its weakest performance for five years.

Why?

The German economy and the eurozone as a whole endured a difficult 2018, as growth slowed and PMI surveys deteriorated. Although Germany managed to avoid a technical recession, Italy was not as fortunate as it posted its second consecutive quarter of negative GDP growth. Weakness in the German economy over 2018 was driven by a combination of factors that weighed on the country’s dominant export sector, namely uncertainty surrounding Brexit, new rules on diesel emissions that have impacted the auto industry, economic slowdown in China and the concerns over Trump’s trade policies.

What to take away from it?

The poor performance of the German economy has coincided with the relatively poor performance of the German stock market. The DAX 30 Index, during 2018, underperformed a number of other developed market indices, declining 18.3% on the year. Whether the German economy and the country’s stock market performs poorly throughout 2019 is the cause of some debate, with some stating that the factors at play last year were transitory and should not have the same impact going forward, however, others suggest that the world’s fourth largest economy faces structural challenges, in particularly in the country’s auto industry. The economic data we have had for 2019 so far have been mixed, with February’s preliminary PMI surveys showing a recovery in the services sector but a further deterioration in the manufacturing sector. The DAX, meanwhile, has rebounded, and year-to-date is higher by more than 9%.

With the outlook for the German economy, and any economy for that matter, difficult to predict, we prefer to focus our investments on companies that have exposure to structural growth opportunities that should perform well through the economic cycle, some of which are situated in Germany. For more details on these companies, or if you have any questions then please contact your Investment Manager.

Please speak to your Investment Manager for any further information.

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