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 China, a vital trading partner. But there are signs that some headwinds facing Germany industry may begin to abate.
These were among the topics on the minds of corporate leaders and investors gathered for the 13th Goldman Sachs German Corporate Conference in late September. More than 170 German listed companies were represented, and more than 1,000 participants came to hear from and meet with them. The three-day event was held in Munich, a growing hub for the European technology sector, where Goldman Sachs recently opened its second office in Germany.
“Many corporate leaders and investors, both at the conference and more broadly, are highly concerned about the country’s structural challenges,” says Michael Schmitz, co-head of FICC and Equities for Germany and Austria in Global Banking & Markets. “There are reasons to believe that Germany will return to growth over the medium term, but it will be a long path.”
There are developments that may help to revive Europe’s largest economy. Energy shortages are easing and Germany’s green energy transition is attracting investment, according to Goldman Sachs Research. German stocks may be primed for further gains, Schmitz says, citing our analysts’ research.
We caught up with Schmitz after the conference to discuss the attitude among German businesses leaders and investors, the rise in German stocks, the country’s critical automobile sector, as well as the reaction to the recent competitiveness report by former European Central Bank President Mario Draghi.
Is the German economy being overestimated or underestimated?
The German economy is going through very difficult times. The country has materially underperformed other advanced economies in recent years. Goldman Sachs Research finds that real GDP is actually unchanged since 2019 in Germany. 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%.
Some of Germany’s challenges are short-term, like the past reliance on Russian natural gas. Others are more structural, like the economy’s dependence on China trade. But we have handled difficulties before in Germany, and we see opportunities for the economy in coming years.
What were some of the opportunities for German corporations and its economy discussed at the conference?
The executives, clients, and investors we gathered in Munich all believe in the core strength of Germany and its potential. Despite all the challenges that we read about every day, Germany remains a stable and attractive place to do business.
People are very interested in foreign direct investment trends in Germany, which suggest there may be strong growth in green and digital projects in Germany. There may be 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 links.
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
Does this mean the German economy is getting past its problems?
Many corporate leaders and investors, both at the conference and more broadly, are highly concerned about the country’s structural challenges. There’s a lack of public infrastructure investment in the country, and it has fallen behind on key metrics like digitalization, according to Goldman Sachs Research. Our economists find that the economy is subject to more regulation when compared to other advanced economies.
There are reasons to believe that Germany will return to growth over the medium term. Energy shortages are easing and, as mentioned before, the country has opportunities in green energy and AI. But it will be a long path.
The auto industry is of utmost importance for Germany, and the outlook for that industry is clearly challenging. The automotive sector contributes roughly 4% directly to German GDP, according to Goldman Sachs Research, and the overall effect is almost twice that. It continues to lose global market share. Amid the rising importance of electric vehicles, there’s a lack of cost competitiveness versus China.
Chemicals is an important industry for Germany. Is there an opportunity there?
If you look at chemicals and the natural gas supply, which is key for this industry, Goldman Sachs Research’s expectation is that Germany may benefit from a huge increase in liquid natural gas (LNG) supplies from 2025 to 2028, leaving behind the energy crisis that was triggered by the Russia-Ukraine conflict.
The longer-term gas price outlook appears favorable for Germany. Our strategists forecast a significant uptick in energy supply growth that will bring the global gas market to material oversupply. If you combine this with the significant green energy transition, Germany looks well positioned to benefit. An interesting development, a positive inflection point, our researchers have reported that European power demand is up 1% or 1.5% in several regions already. It’s a reason to be optimistic.
Amid the economic challenges, how do you explain the rise in Germany’s DAX index of stocks?
It’s quite interesting. The DAX is up more than 14% year-to-date in 2024 (as of October 10), and the index rose 19% for the full year in 2023. The DAX has outperformed France’s CAC 40 so far this year. 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.
In contrast, our research analysts note that the MDAX midcap index is 33% exposed to Germany, and the smaller companies in the SDAX are 50% exposed to Germany. As recently as August, the MDAX was down as much as 12% for the year. Goldman Sachs Research says the midcap index should be one of the main beneficiaries of lower interest rates, and it looks undervalued for its growth.
Another thing our research analysts note is how equity flows into Europe in general and Germany in particular have been consistently negative since early 2022. And there’s another remarkable data point: The share of listed German equities in the portfolios of German households has shifted from 75% of the portfolio 10 years ago to just 50% today.
That sounds negative, but it’s actually constructive. You can see the potential for the incremental investor to come into equities as things improve.
What came up at the conference about Mario Draghi’s recent competitiveness report?
Looking back, annual European industrial investment has been lagging behind the US by almost 2% of GDP since 2012, according to Goldman Sachs Research. This is a significant problem. And the Draghi report on EU competitiveness addresses exactly this issue. He presents actionable policy proposals at the sector level and the institutional level. He wants to trigger structural change in the European economy and tackle sluggish productivity growth. He estimates that the total additional investment needs to reach roughly €750 to €800 billion to bring the investment rate in the EU back to the levels we had in the 1970s.
What investors shared during the conference is that the funding of those proposals remains the most challenging issue. There are significant hurdles to implementation of Draghi’s recommendations.
Finally, how important are recent economic stimulus measures in China?
This is very important for Germany. China remains one of Germany’s biggest export markets, and it’s the country’s biggest source of imports, according to Statistisches Bundesamt. So, in general, it is a very positive development for the still China-heavy German economy in the short term. Improvement in China could drive demand here, at least in the short term. But the authorities China have to now deliver on the announced policy measures. In the mid to long term however, 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.
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