The German Growth Engine Revs Up
by Tony D’Altorio, Investment U Research
Wednesday, August 18, 2010
The German economy jumped in the second quarter, helping eurozone GDP to rise 1%. The land of bratwurst and beer rose 2.2% quarter-on-quarter, equal to a 9.1% annual rate.
That kind of emerging market growth marks the nation’s best-ever economic performance and should certainly grab investors’ attentions.
Even before it released that latest data, German business confidence was rising.
Ifo’s July business confidence survey saw a jump to 106.2% from June’s 101.8%, its sharpest increase since German unification in 1990 and the highest reading in three years.
Wish we could say the same here in the U.S.
In addition, it grew across the board, despite its notorious dependence on exports. Companies invested in capital and consumers began shopping more… both good omens for a self-sustaining economic recovery.
Likewise, unemployment shrank to 7.6% – the lowest in several years – and consumer confidence rose. And, despite U.S. criticism that Germany isn’t consuming enough, its June imports surged to a record $100 billion.
Adding to that optimism, the German chamber of industry and commerce predicted that 2010 imports would climb higher than 2008′s record of €808 billion.
German Export Locomotive
To give credit where credit is really due, Germany really has to thank its exports business. The euro’s fall earlier this year made the country’s products very competitive.
Germany’s economy is powered by its huge industrial sector. It makes up almost a quarter of total GDP and predominantly covers four sectors:
- Carmakers: with €263 billion in revenues and 18% of exports in 2009.
- Machinery: with €162 billion in sales and 16.6% of exports in 2009.
- Chemicals: with €138.7 billion euros in 2009.
- Electronics: with €121.3 billion in 2009.
For now, German industrialists have plenty of reason for cheer. Many plants are running at full speed again, with some companies expanding capacity and re-hiring workers.
Orders in the engineering sector – Germany’s economic backbone, which includes giants like Siemens ADR (NYSE: SI) – shot up 32% year-on-year in the first half of 2010. Last year, it fell 38%.
That order boom has led companies to invest once again in new equipment. After several years of squirreling away their cash, they feel ready to expand again.
Along with earlier mentioned factors, the flexibility of German unions and workers helped bring them to this point. Because all parties involved were willing to work with each other, companies held onto their core staff during the economic crisis.
Therefore, yet again, they’re doing well while their American competitors lag.
The German Reach
Germany is also very open to the world. Its industrial groups tapped into emerging markets much faster than its competitors in Europe and the U.S.
For example, Volkswagen ADR (OTC: VLKPY) entered China more than 30 years ago. Today, it dominates that market, selling more cars there than it does back home.
Admittedly, that strategy does carry some risk.
Already, demand for luxury cars, appliances and machinery all rely heavily on China. And now that China is slowing, Germany could as well.
Diether Klingelnberg, chairman of a machine tools maker, sees demand coming from “… China by a long way, then India, Brazil, then Russia.” He cautions that the upswing is “not supported by broad shoulders” across the globe.
But even if the country does slow down, its companies can always fall back on their overflowing order books. Siemens, for one, reported an €89 billion euro backlog last month, its highest in its entire 163 years.
What Germany Has to Offer
Investors who like all that growth can buy into Siemens, tech titan SAP ADR (NYSE: SAP), Volkswagen ADR (OTC: VLKAY) BASF ADR (OTC: BASFY) and Bayer ADR (OTC: BAYRY).
Or check out the iShares MSCI Germany Index Fund ETF (NYSE: EWG) or the closed-end New Germany Fund (NYSE: GF), with its heavy, 50% weighting in the industrial and material sectors.
Regardless, the German industrial sector powerhouse looks set to continue its strong growth for the foreseeable future. And investors are urged to get on board.
Good investing,
Tony Daltorio
Related Investment U Articles:
- Germany’s Economic Growth Points Towards Emerging Market Demand
- Euro or Not, Siemens is a Steal
- What European Crisis? German GDP Growth Hits a Quarterly Record
- Siemens Revamps Its Industrial Business
- Bad German GDP Numbers Will Kill This Sector
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