Europe's Downturn Drags Down German Manufacturers


It's another down week across the Atlantic for investors, and Germany's DAX followed the herd by losing 0.6% over the past five days. The index managed to recover well on Friday after an upbeat U.S. payroll report, but weakness lingers in Europe. Germany's tenuous position as a leader in the continent's recovery continues to chafe against the goals of peripheral European nations, which haven't reacted well to German austerity ambitions. Germany got some good economic news this week, but will its future be bright enough to turn around Europe's slumping fortunes and reward European investors?

Exports up, outlook down
This week the Deutsche Bundesbank, Germany's central bank, slashed its economic growth forecasts for the country by 0.1% down to 0.3%. The Bundesbank also cut its 2014 growth prediction to 1.5% from an earlier estimation of 1.9%, although that figure would prove to be leaps and bounds better than Europe's current recession-plagued environment. Still, bright spots have emerged in Germany as Europe's largest economy tries to stave off the contraction of its neighbors. In April, the country's exports rose by nearly 2% over March and by a whopping 8.5% year over year -- great news for the nation's manufacturers.

Still, Germany will have a hard time getting the eurozone to play ball with its hopes of digging the region out of recession. Debt-plagued nations such as Italy, Spain, and Greece have battled against Germany's conservative fiscal policy and austerity measures. Former Italian leader Silvio Berlusconi claimed that Italy needed to "seek a test of strength" against German leader Angela Merkel.

With Italy's youth unemployment rate hovering near 40% and the country's economy going anywhere but up, it will be hard for Merkel's talks of patience and fiscal conservatism to alleviate Italy's frustration. If Italy, Europe's third-largest economy, continues to be stuck in a recession, it will be that much more difficult for the eurozone at large to dig itself out of its hole -- and for Germany to avoid the pitfalls of its neighbors.

The export boost will help out some of Germany's biggest corporations and stocks, however. German automakers have taken a beating in the recession, and May didn't help: New-car sales in the country fell by nearly 10% for the month after notching a rare gain in April. Both BMW and Daimler have performed better than many carmakers in Germany this year, but both saw sales flatten over the early part of the year. Daimler's stock has performed well in the year so far, but to avoid any fall, the company -- along with BMW -- announced that it will not participate in the traditional summer break during which German automakers close their factories for a few weeks. Right now, neither company can afford that.

Siemens's stock hasn't fared so well recently: Its shares have shed 4.8% year to date. Incrased exports should help if that trend keeps up, as Siemens conducts a significant amount of international business as Germany's pre-eminent engineering firm. Company leadership still projects a double-digit profit margin for 2014 despite the weak business climate in Europe, although Siemens has already lowered its outlook for the current year as solar-related losses and other charges weigh on its bottom line. Siemens will need to charge up its energy business to succeed, as the company expects profit from the unit to come in on the low side of earlier full-year projections.

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