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Comment: Investors continue to focus on Germany as the European growth engine

Henning Gebhardt (pictured), head of European equities at DWS Investments, looks at why investors are continuing to see Germany as the European growth engine…

The German economy continues to boom. Just a few weeks ago leading German economic research houses raised their forecasts for the German GDP growth to 2.8%. We forecast a growth of 3% year over year. In 2011, there is a high likelihood that Germany will again show the highest growth within the euro zone – as it did in 2010.

While strong exports contributed mostly to the growth in 2010, the recovery is now broadening further. In addition to a strong export business, the domestic demand both from German companies as well as private households has increased. The reasons for this include, the low unemployment rate, which is at an 18-year low, and the increased output capacity in many industries. Thus the recovery has become more sustainable.
We see growth potential for the German economy in the coming years, too. German companies have done their homework and have improved their competitive position significantly. This is partly due to a tight control of unit labour costs over the last few years. Many other European countries suffered from significantly increased unit labour costs, which gave them a competitive disadvantage.  
A further indication of Germany’s competitiveness is the constant high GDP share of the manufacturing industry over the past years. While other countries had to relocate production to other countries, Germany was able to keep a large part of the production at home. The German automotive industry is as a good example; the number of cars produced has remained relatively stable at around 5 million cars per year since 1999. However, the value of each car has increased significantly. Germany remains a market leader in many sub segments of the mechanical engineering and equipment manufacturing industry.
The good overall economic situation was clearly reflected in the earnings of a lot of German companies. Car manufacturers have reported record sales, in particular driven by exports into booming emerging markets. In China the purchase of Audi cars has now surpassed that of Germany. Industrial and chemical companies were also able to increase sales and profits significantly. The stock price of German companies followed this positive earnings development.
The ongoing uncertainty about a solution for the European sovereign debt crisis, stronger increased raw material prices as well as a possible headwind by a stronger euro are currently weighing on the stock market and could result in an higher volatility, especially during the summer months. Several economic indicators, like the IFO business climate index, could also get weaker and thus signal a slight slowdown of the economy in the second half of 2011. Therefore we have a conservative outlook for the DAX at the end of the year of 7600 to 7800 points. The mid-term outlook remains nevertheless positive and ideally new all-time highs for the DAX could already be within reach this year.

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