The blue-chip DAX index closed Friday trading 1.86% higher amid reports of German political parties securing an agreement for a historic fiscal package. This development signals a pivotal moment for the German economy, as it navigates through various economic hurdles. German Chancellor-in-waiting Friedrich Merz stated that he has successfully reached a deal with the Green Party concerning the proposed augmentation in state borrowing, which includes a substantial allocation of 100 billion euros intended for the country's climate and economic transformation fund.
This investment is crucial as Germany aims to bolster its growth trajectory while addressing climate change and economic demands. However, there are concerns about future spending, especially with higher defense expenditures driving larger funding requirements. Analysts from BofA Global Research emphasized, 'Higher defense spending will create bigger funding needs, but for this year and probably next, growth returns will likely be very low due to high import content.
The deficit-financed EUR 500bn capex program plan is considerable, about 12% of GDP, even when stretched over 10 years.' Additionally, they noted the need to revise growth forecasts for Germany, projecting an adjustment to 0.1% for this year, a reduction of 30 basis points, while maintaining a forecast of 0.8% growth for 2026.
This cautious outlook is influenced by trade policy uncertainty and rising real yields impacting the domestic economy similar to the broader Euro area. In economic news, Germany's current account surplus witnessed a decline of 9.1 billion euros, leaving it at 11.8 billion euros in January. The Bundesbank highlighted that this dip reflects a contraction in the surplus of goods trade alongside 'invisible' current transactions, incorporating services, primary, and secondary income.
Furthermore, the February annual inflation rate confirmed at 2.3% indicates ongoing price pressures. On the corporate front, BMW ($BMW) announced a year-over-year decline in both profit and revenue for 2024, which raised concerns among investors. Company executives warned reporters that potential US tariffs could exert a negative impact on its 2025 earnings, estimating a hit of approximately 1 billion euros.
Consequently, BMW's stock closed down by 0.27% on Xetra. Meanwhile, Commerzbank ($CBK) saw a 2.50% decline after Italy's UniCredit revealed it received approval from the European Central Bank to increase its stake in the German lender to 29.9%. However, this proposed stake increase remains contingent upon approval from additional authorities, including the German Federal Cartel Office.
Overall, these developments highlight the fragility of the German economy as it balances fiscal initiatives with pressing economic realities..