Brexit is going to cost Germany 0.3% of growth in 2017. According to a recent report from the DIW institute, “Britain’s decision to leave the European Union would limit Germany's growth prospects in the coming months.”
Notably, Britain is Germany’s third most important export market. However, German exports to Britain stagnated year over year to almost €44.8 billion ($50.1 billion) in the first six months of 2016.
Apart from Brexit-related woos, fewer working days in 2017 will impact growth by 0.4%. DIW now forecasts German economic growth decline from an estimated 1.9% in 2016 (up from previous outlook of 1.7%) to almost 1% (down from previous outlook of 1.4%) in 2017. (Read: 5 Overlooked EM ETFs Gaining from Fed Policy)
DIW’s outlook for the current year is slightly more positive than the German government’s forecast of 1.7% growth, which is in line with the 2015 growth rate. The institute noted that a strong first half 2016 domestic performance prompted it to raise the full-year 2016 outlook.
Brexit to Hurt German Exports
Germany is primarily an export driven economy. It is the second largest exporter in the world with overseas sales accounting for more than one-third of its national output. Germany posted a €19.5 billion trade surplus in July 2016, down from €24.8 billion reported a year ago.
Notably, the July trade surplus figure is the least since January as exports fell 10% year over year while imports shrank 6.5%. Most significantly, sales declined 7% to the EU countries, primarily attributed to subdued demand in the region.
Moreover, industrial production data was not favorable in July. Production fell 1.5% on a monthly basis, compared to upwardly revised growth of 1.1% in June. On a year-over-year basis, July’s production was down by 1.2%, compared to growth of 0.9% in the previous month. (Read: Best Sector ETFs for a Rising Rate Scenario)
Germany’s BGA trade association recently lowered its export outlook for 2016 based on expectation that Brexit will have a massive impact on exports. The association now pegs growth at the range of 1.8% to 2% as compared to the previous outlook of 4.5% provided in April.
Investor Confidence Hits Rock Bottom
The ZEW Center for European Economic Research in Mannheim said that its index of investor and analyst expectations, which aims to predict economic developments six months ahead, remained unchanged at 0.5 in September. Meanwhile, Bloomberg had predicted an increase of 2.5. (Read: UK ETFs in Focus as the Economy Defies Brexit Fears)
Per the ZEW report “Business confidence slumped the most since 2012 in August and a gauge for private-sector activity fell to a 15-month low.” Moreover, economic expectations in Germany dropped by a higher-than-expected 2.5 points to 55.1 points.
Although readings above 50 indicate expansion, the significant drop suggests an uncertain economic outlook due to lackluster global growth and the looming Brexit impact.
Further, we note that the German stock index DAX is down almost 3.2% on a year-to-date basis.
ETFs Decline on Weak Outlook
Most of the Germany-focused ETFs fell following the outlook cut by DIW for 2017.
iShares MSCI Germany ETF ((EWG - ETF report) ) lost 3.3% over the last five days. The fund tracks MSCI Germany Index and has a holding of 63 stocks. The fund’s expense ratio is 0.48% while dividend yield is 2.37%. EWG has managed to draw $3.59 billion in AUM till September 15, 2016.
First Trust Germany AlphaDEX Fund ((FGM - ETF report) ) declined 2.6% over the last five days. The fund tracks NASDAQ AlphaDEX Germany Index and holds 41 stocks. The fund’s expense ratio is 0.80%, while dividend yield is 1.40%. FGM has managed to pull in $120.7 million in AUM as of September 15, 2016.
Recon Capital DAX Germany ETF ((DAX - ETF report) ) lost 3.1% over the last five sessions. The fund tracks DAX Index and has 30 stocks. The fund’s expense ratio is 0.45%, while dividend yield is 0.83%. DAX has managed to rake in $13.6 million in AUM as of September 15, 2016.
SPDR MSCI Germany Quality Mix ETF ((QDEU - ETF report) ) declined 2.5% over the last five days. The fund tracks MSCI Germany Quality Mix A-Series Index and has 59 stocks. The fund’s expense ratio is 0.30%, while dividend yield is 2.05%. QDEU has managed to attract $12.9 million in AUM till September 15, 2016.
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