M6 BARRON’S July22,2019
EuropeanTrader
Germany Needs a Jolt
ByPierreBriançon
SO MUCH FOR THE EUROPEAN UNION’S SO-CALLED ECONOMIC POWERHOUSE: GER-
many will bethe slowest-growing European economythis year—save for
Italy, crippled by many years of weak growthand a populist government.
German gross domestic product will grow only by 0.5% in 2019 versus 1.5%
in 2018, according to the government’s own forecast. That compares to an
average euro-zone growth rate estimated at around 1.2% this year.
Germany, an export-oriented economy, has been hard hit by the turmoil
in global trade. Thus, its slowdown shouldn’t come as a surprise. If the cur-
rent slump continues and worsens, the governing coalition of Chancellor
Angela Merkel might finally pay heed to the many economists
and international organizations urging Berlin to temper its
longstanding aversion to deficits and debt. The German gov-
ernment has proved skilled in recent years at playing deaf to
the choir of economists—not only foreign; some are even Ger-
man—exhorting Berlin to stop obsessing about public finance.
Merkel & Co. need not worry that efforts to boost the economy by mov-
ing away from an economic model based on savings and huge current-ac-
count surpluses will dent the German stock market. That’s because Ger-
many’s biggest companies are global players, and their profitability no
longer is tied to the economic vagaries—or policies—of their home country.
To look at the performance of German stocks since the beginning of
2019, you’d hardly notice something is amiss. The benchmark DAX index
has performed in line with other European bourses since January and is
up 18% this year. That is comparable to gains in the French CAC 40 and
the Euro Stoxx pan-European indexes, and well ahead of the United King-
dom’s Brexit-affected FTSE 100 (+12%).
In its latest report on Germany, the International Monetary Fund
praised the cautious attitude of Berlin governments past and present, but
emphasized that now should be the time to reap the fruits of a decade of
thriftiness. The IMF says Berlin ought to “support potential growth
through public investment...and to provide further tax relief for low-income
households which, along with stronger wage growth, would restore their
purchasing power.”
There is “ample fiscal space” to do so, the IMF noted. The German gov-
ernment, after all, has booked a fiscal surplus for five years in a row, and
debt is fast shrinking toward 50% of GDP—well below the EU’s theoretical
60% limit, not to mention the 80% average in the rest of Europe.
The IMF also noted that disposable income and spending among Ger-
man households have declined for five consecutive years. Those numbers
hardly suggest unmitigated economic success.
If Merkel’s government finally wakes up to the necessity of boosting
demand and consumption, most large German companies will take it in
stride. The DAX index is heavy with automobile manufacturers and indus-
trial-goods giants. It counts only two consumer-goods makers—and one of
them, Adidas (ADS.Germany), has a footprint, so to speak, that extends
well beyond its home market. Less than a third of the company’s sales are
booked in Europe. Adidas shares are up more than 54% this year—a clear
illustration of the disconnect between Germany’s economy and its big com-
panies’ finances.
European
Markets,
page27
EmergingMarkets
Mexico: Be Ready to Bail
ByCraigMellow
MEXICO’S ECONOMIC OUTLOOK IS GOING FROM BAD TO WORSE EIGHT MONTHS INTO