Strategy
German Economy Has Lost Its Mojo – RBC Wealth Management
Frédérique Carrier, head of investment strategy for RBC Wealth Management in the British Isles and Asia, discusses why the German economy has become a laggard, the measures taken by the coalition government to remedy the situation and her views on whether they will work.
Frédérique Carrier at RBC Wealth Management believes that the German economy, the sixth largest in the world, appears to have lost its mojo.
The export powerhouse, once leading the region’s growth, has become a laggard, Carrier said in a statement. The German economy entered into a recession in May, after its GDP fell by 0.3 per cent in the first quarter of 2023 from the previous quarter, with high prices taking a bigger toll on the country's economy than originally estimated. Its economy also stagnated in the second quarter from the previous three months, with GDP contracting by 0.2 per cent, whilst other states in the Eurozone registered slight growth.
“Its industrial sector can no longer rely on cheap Russian gas while structural issues have started to bite. A fixation on balancing the budget led to chronic underinvestment in infrastructure and in research and development. The dependence on China proved unhelpful as China’s recovery sputters, and an ageing population and heavy bureaucracy compound the challenges,†Carrier continued.
“The coalition government seems to have woken up to the situation,†she added. The German government recently announced a 10-point programme to support the economy, mixing new initiatives with pre-announced measures. “The principal new measure announced is the introduction of tax incentives for investments in energy efficiency, as well as R&D, valued at some €7 billion ($7.5 billion) (0.02 per cent of GDP). The government also announced that half of the €200 billion it pledged earlier to finance the green transition would be available next year,†she said.
Carrier thinks these measures will be insufficient by themselves to turn around the economy’s fortunes. Nevertheless, they are an encouraging sign that the authorities are no longer ignoring the situation.
“Shares of Danish renewable energy company Ørsted, the largest offshore wind farm developer and operator globally, plunged over 20 per cent in August, after the company announced $2.3 billion of anticipated impairments on its US offshore wind portfolio,†Carrier continued.
The impairment reflects the likely pressure on project returns owing to a confluence of adverse factors including project delays, the lack of additional US tax credits, and higher interest rates. The announcement, which underscored the challenges associated with the higher cost of capital and supply chain headwinds facing offshore wind companies at present, also weighed on the share prices of other European renewables-focused utilities stocks, Carrier said.
“The STOXX Europe 600 ex UK Index’s 1.6 per cent gain during the week helped to trim its fall to -2.5 per cent during August,†she added. Europe’s weakening macro and earnings' momentum remain headwinds to the region’s relative outperformance potential, in Carrier's view, warranting moderate underweight positions.
