DAX 40 index and the “sick man of Europe”

German stocks are thriving even as the economy remains under intense pressure. The DAX 40 index, which tracks the biggest companies in the country has surged to a record high and is one of the best performers in Europe. It has surged by 43% from its lowest level in 2022. And unlike the S&P 500, which has been driven by the Magnificent 7, the DAX rally is broad-based.

DAX index chart

The sick man of Europe

The performance of the DAX index is hiding the fact that the German economy is not doing well. A report published on Wednesday showed that the country’s industrial production continued weakening in December. It dropped by 1.6%, the seventh straight month, making it the longest downturn since 2008.

Other economic numbers paint a picture of an economy that is ailing. The most recent manufacturing PMI number came in at 45.5, higher than the previous month’s 43.3. But the PMI still remained below the expansion zone of 50. In contrast, the US PMI came in at 50.5. 

The construction sector is also languishing as the PMI came in at 36.3 on Tuesday. It has been falling after peaking at 55.5 in January 2022. Retail sales have remained in the red since August 2022 while the unemployment rate has risen.

Taken together, Germany is expected to be the worst-performing economy in the G7 this year, according to the OECD. It is expected to rise by 0.3% after contracting by 0.1% in the previous year. It will even underperform the UK, which is expected to grow by 0.7%.

Germany is facing major challenges as the automobile sector, which is a major part of the economy goes through a major transition. For one, Chinese manufacturers are now selling millions of vehicles around the world and the trend is expected to continue. 

Why is the DAX index surging then?

Therefore, the question is why the DAX index is rising as the German economy goes through a major weakness. There are the first main reasons. First, the jump is in line with the performance of other global indices. For example, in the United States, the S&P 500 and Nasdaq 100 indices have all surged to a record high. 

The other reason is that most German companies are global companies that make most of their money abroad. For example, the best-performing companies in the index this year are Siemens Energy, SAP, Airbus, Munich Re, and Volkswagen. While these firms do a lot of business in Germany, they generate most of their income from other countries.

Finally, there tends to be a disconnect between stocks and the economy. A good example of this is the fact that Venezuelan and Argentinian stocks surged hard in 2023 even as their economies suffered a deep contraction.