Germany was in recession while stocks hit all-time highs

Germany’s Economy Minister Robert Habeck still has a lot of work to do as Germany plunged into recession over the winter. Florian Gärtner—Photothek/Getty Images

For those looking for evidence that financial markets don’t always reflect the real economy, look no further than Germany. Less than a week after the country’s blue chip index hit a new all-time high, the federal statistical agency reported Thursday that Europe’s biggest economy is in recession. Downward revisions to earlier estimates show that gross output fell for two consecutive quarters (0.5% at the end of last year and 0.3% at the beginning of this year), meeting the criteria for a technical recession.

Originally, official estimates suggested a stagnation of 0.2% each.

So what is going on here?

The root cause of the country’s ill health is a contraction in private consumption during the winter months, exacerbated by rising energy costs due to the abrupt shift away from dependence on cheap Russian oil and gas.

Domestic consumers typically have relatively low homeownership rates and a lack of an equity culture, so they have to save a sizeable portion of their income.

However, the 1.2% drop in the first quarter was worse than expected as inflation, at over 9% per annum, weighed on their disposable income.

Warmer temperatures and lower utility costs point to short-term relief, but a combination of factors has led to higher interest rates dampening activity in capital-intensive industries such as manufacturing and construction, which were once dynamic. It has been suggested that Europe’s economic engine may eventually stall.

The Düsseldorf-based Macroeconomic Policy Institute predicts only “tepid growth” over the coming summer months. “Unlike other phases of expansion, China’s recovery has not been underpinned by robust investments that benefit the German export economy.”

Restoration is already underway

The chief economist at Hamburg Commercial Bank, which co-publishes S&P Global and Germany’s Purchasing Managers Index, believes the recession is already over thanks to a service-sector recovery.

“There are still signs of stuck demand here, such as: [COVID]Whether it’s traveling or eating out at a restaurant,” said Silas de la Rubia. luck.

Moreover, the financial sector is not going to curb the supply of credit to the real economy, as was widely feared in the US following the collapse of three major regional banks.

“Lending terms have certainly tightened, but historically they are not excessive and not enough to worry about a credit crunch,” said Della Rubia.

Nonetheless, he expects growth to be just 0.2% for the full year, due to rising borrowing costs and a weak outlook for China’s exports.

The fact that the 40 blue-chip German companies that make up the DAX closed at record highs on Friday amid such challenging economic conditions is due in part to an important differentiating aspect of the DAX, Della said. Rubia explained.

“It’s a so-called performance measure based on total shareholder returns, which means that the automatic reinvestment of dividends is factored into the calculation,” he said. “If you look at the S&P 500 equivalent ‘price index’ adjusted for this effect, you’ll see that it’s still well below all-time highs.”