04 November 2005

EZA 708: Briefing Note: ECB Observer

Germany; Industry/Sector outlook
Investment and exports taking a breather – consumer services gradually recovering The (tri-annual) business survey of the German trade association DIHK 18 Oct - the German economy has overcome its soft patch in 3Q 05. This is significantly more optimistic than the economic institutes forecast released 20 Oct The current re-acceleration appears to have a broad base; affecting service sectors and manufacturing sectors alike. Even the construction sector - hit by secular weakness - seems to have sprung back to life. Exports and equipment investment being the main drivers of the economy are regaining steam – both are forecast to grow at rates of 5%+ in 2006. Private consumption - there is a large gap between the optimistic “bottom-up” forecast of the DIHK and the “top-down” forecast of the institutes, who see the decline in household spending continuing into next year. We lean towards the DIHK forecast, expecting a 0.7% increase in consumption. All this implies that the recovery will take hold of the German economy in H2 05 and next year, with pricing power still moderate.

SummaryAsset Conclusions German stocks in general should benefit from a gradual pace in domestic demand, coupled with cost cutting and productivity enhancing measures of firms. In particular investment and construction related stocks should outperform, pulling consumer stocks and financials along.

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© Graham Bishop