Germany’s recent election has set the stage for potential economic revitalisation, with implications for investment in key sectors including infrastructure, digitalisation, and defence. Domestic asset managers say a more business-friendly government could unlock growth opportunities, particularly if fiscal policies – such as the country’s stringent debt brake – are relaxed.
“Now the chances for an improvement of the framework for the economy, and for stable political conditions, are not bad. The election result will support the first attempt to a recovery of the German economy,” said Ulrich Kater, chief economist at DekaBank.
The Christian Democratic Union (CDU) and its Bavarian sister Christian Social Union (CSU) won the election with 28.6% of the votes, and could form a grand coalition government with the SPD, which ended up in third place with 16.4% of the votes.
The centre-right bloc could alternatively sound out a three-way governing coalition with the SPD and the Greens, which received 11.6% of the votes.
“It is now important to quickly set up a government, and [lay out] an economic programme that supports the necessary structural change in the German economy,” Kater added.
According to Carola Schroeder, head of portfolio management at Union Investment, the lack of investment activity – from both the public and private sectors – is hampering growth.
The change in government may now open the door to structural reforms, more flexible fiscal rules to increase public investments and, where appropriate, support private investments, thereby increasing growth potential in the medium term, she said.
‘Spirit of optimism’ sorely needed
Germany needs public and private investment in digitalisation, for the decarbonisation of the economy, innovation, infrastructure, and housing to re-start the economy after two years of recession.
Jürgen Michels, chief economist at Bayerische Landesbank, said during a conference call this morning that Germany needs to bring back “the spirit of optimism”, regardless of whether fiscal rules are relaxed.
Christoph Berger, CIO for European equity at Allianz Global Investors, said that there is a need for further investment in the defence sector.
“A more attractive environment for start-ups – or research and development in general – could also help innovations become commercial [successes],” he added.
The Handelsblatt business daily drafted a reform agenda for the next government to bring back growth, underlining that Pensionskassen, a vehicle that offers occupational pensions but subject to restrictive insurance-type investment rules, are “sitting on billions in capital” that could support domestic tech start-ups to expand globally.
A new business-friendly government, cutting red tape, could boost the stagnating economy. From an equity perspective, this would benefit SMEs in the energy infrastructure, digital, and artificial intelligence (AI) sectors focusing on the digitalisation of value chains in healthcare, construction and public administration.
The outlook for companies in the defence sector, and in security in general – including cybersecurity – driven by rising defence budgets would improve with a new business-friendly government, Berger noted.
The debt brake problem
Germany’s public investments are constrained by the debt brake (the so-called Schuldenbremse), the reform of which requires a two-thirds parliamentary majority in the Bundestag.
In practical terms, either the support of the far-right party Alternative for Germany (AfD) or the far-left party Die Linke would be needed to reform the fiscal rules, however.
“Expenditures on education, infrastructure and defence are not compatible with the German debt brake. However, a softening of the debt brake anyway harbours the risk that higher expenditure will not flow into the necessary future investments in a targeted manner,” Berger said.
Targeted “special funds” (Sondervermögen) offer a better solution than a reform of the debt brake, and one possible approach, according to Berger, would be setting up three such funds of €100bn each for defence, infrastructure and education.
“From a capital market perspective, these are all important aspects and the formation of the coalition will be closely monitored against this backdrop,” he said.
Laura Cooper, head of macro credit and global investment strategist at Nuveen, said that rules could potentially change to reform debt rules excluding infrastructure investments.
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