The DAX(GDAXI) has been on an unexpected tear recently, launching into frontiers previously unknown. In mid-February, it reached the psychological 11,000 point mark for the first time. The last time the DAX reached a new high, it was followed by a slump, but this time it hasn’t. In fact, rather than giving investors the sense it has reached a plateau, it has in fact continued to climb. In late February, it increased to just under 11,100, and just this Monday it was up to 11,442. So what is driving this growth? I mean, wasn’t this the same economy that saw the DAX sink below 9,000 just a few months ago?
It all started when Germany saw better-than-expected GDP growth. Investor sentiment was still positive for the most part, despite the news that the Germany economy may be flirting with deflation. But when the numbers came out in mid-February, the full-year 2014 gross domestic product grew 1.6 percent, beating analyst expectations.
In addition to that, domestic spending was up 0.8 percent, exports grew 1.6 percent (0.3 percent faster than imports) and employment was at a post-reunification high. And if that wasn’t enough to make you bullish on the German economy, it also managed a 0.6 percent surplus on output during the year, beating the initial estimate of 0.4 percent. With all of these combined, it’s no wonder investor confidence has gone through the roof.
Can it remain?
That’s the big question right now. While the country is obviously doing what it takes to get back on track, there are some external influences that it won’t be able to shake so easily. Despite Germany’s unexpected bump in growth recently, the performance of the rest of the Eurozone has been dismal. For example, France is still struggling with record unemployment. Italy, the Eurozone’s third largest economy, is still stagnant, hoping 2015 will be the year it finally emerges from its recession. And Greece’s new deal to extend its bailout loans is nothing more than a black smudge on its neighboring countries.
So what should Germany do? At this point, the best of all likely scenarios is to just wait. Despite the ongoing weakness in the rest of the Eurozone, inflation did rise in February year over year to -0.3 percent, up from -0.6 percent in January. And the unemployment rate in the Eurozone was down to 11.2 percent in January, a three-year low.
It seems, therefore, that the rest of the Eurozone is moving in the right direction, it’s just slow going. The region is also awaiting the final stages of the European Central Bank’s quantitative easing program. At this point, there is no formal start date, but the ECB is expected to start its 1 trillion euro program to boost the Eurozone sometime during March. While Germany has been a staunch detractor from the ECB’s stimulus program, and the past has proven that each country reacts differently, there aren’t many other options at this point—so it would behoove Germany simply to continue to lead the way and have the patience needed to wait for the rest to come along.