What does Germany's historic fiscal stimulus mean? GDP growth is expected to increase by 1.5%, the first step to solving weak exports

Guotai Junan Securities believes that Germany's recent passage of a €500 billion fiscal stimulus plan and support for the EU's €800 billion "rearmament of Europe" plan marks Germany's departure from long-term fiscal austerity, restarting the fiscal expansion cycle and accelerating the process of strategic autonomy.

In the era of globalization, Germany's economic growth model is "Central European market size + cheap Russian energy + American security protection." However, Germany's government leverage ratio is only 63%, and defense spending accounts for only 1.5%, both of which are among the lowest in major global economies. As the factors driving economic growth weaken one by one, Germany's economy urgently needs to strengthen strategic autonomy, and an increase in the government's leverage ratio will provide new growth momentum for the German economy.

In terms of impact, the annual average scale of the €500 billion plan is about €41.7 billion, and Germany's GDP in 2024 is estimated to be about €4.3 trillion, resulting in a corresponding GDP ratio of 0.97%. According to the calculations in the German Ministry of Finance's 2025 budget document, a 1% change in the deficit rate affects GDP growth by approximately 1%-2%, therefore this plan is expected to drive Germany's GDP growth by about 1.5%.

For investors, the DAX index valuation has basically completed the repair from undervaluation to a reasonable level, and future growth momentum will come from profit improvement and the return of retail funds, as global funds are undergoing a transatlantic rebalancing.

Breaking the "debt brake," Germany passes a massive fiscal stimulus plan

On March 18, the German parliament passed the €500 billion fiscal stimulus plan with an absolute majority. Guotai Junan Securities stated in a report on March 25 that this marks the official end of Germany's fiscal austerity cycle since the European debt crisis and the re-entry into a fiscal expansion cycle. As the economic engine of the EU, Germany's shift in fiscal policy not only signifies a loosening of fiscal policy in one country but also indicates that the overall fiscal policy ceiling of the EU has been opened.

In terms of impact, the annual average scale of the €500 billion plan is about €41.7 billion, and Germany's GDP in 2024 is estimated to be about €4.3 trillion, resulting in a corresponding GDP ratio of 0.97%. According to the calculations in the German Ministry of Finance's 2025 budget document, a 1% change in the deficit rate affects GDP growth by approximately 1%-2%, therefore this plan is expected to drive Germany's GDP growth by about 1.5%.

Guotai Junan Securities stated that in the era of globalization, Germany's economic growth model is "Central European market size + cheap Russian energy + American security protection." However, Germany's government leverage ratio is only 63%, and defense spending accounts for only 1.5%, both of which are among the lowest in major global economies. Conversely, the space for the German government to increase leverage is also very large, which is why this €500 billion special plan has attracted so much attention—Germany is willing to restart large-scale fiscal measures and re-enter the leverage cycle.

After the Russia-Ukraine conflict, Russia's military spending for 2024 has reached 40% of its federal budget and 9% of GDP, while Europe has significantly underinvested in military spending during the globalization period. This plan will establish new financial instruments to serve defense expenditures and encourage private capital and investment banks to increase their investments in the military sector.

Long-term Investment Insufficiency, Infrastructure and Industrial Investment Urgently Need Boost

Guotai Junan Securities believes that Germany is a typical export-oriented manufacturing economy with relatively weak domestic demand. Germany's per capita GDP is €50,800 (2024, approximately $55,000), but compared to other developed economies, Germany's economy relies more on external demand due to its weaker domestic demand, with an overall economic structure similar to that of South Korea in East Asia. From the perspective of GDP growth structure, exports account for 42.7% of Germany's GDP (average from 2017 to 2023), while net exports account for 4.8%.

On the other hand, Germany's domestic demand has been weak for a long time, with private consumption accounting for only 50%, far below the OECD average of 59.5%, and lower than countries like the UK and the US, being closer to South Korea. In terms of government consumption, Germany is relatively strong, with government consumption accounting for 20.9%. In terms of investment share, Germany is weaker than Japan and South Korea, which are also manufacturing-led economies, with Germany's investment share only at 21.9%. In terms of driving rhythm, Germany's exports and investments fluctuate in the same direction, while private consumption and government consumption offset each other, resulting in overall weak consumption elasticity.

From the perspective of economic driving rhythm, Germany's exports and investments fluctuate in the same direction, while private consumption and government consumption offset each other, resulting in overall weak consumption elasticity. This structure makes the German economy particularly sensitive to changes in the external environment. In recent years, Germany's economic growth has faced two major challenges: intensified global industrial competition and rising factor costs. Germany's economic performance has been relatively poor among major economies in recent years.

Guotai Junan Securities states that the weak German economy is mainly due to two reasons. First, the intensified global industrial competition has led to weak German exports, as German industrial products face competition from East Asian economies and the impact of Brexit, resulting in a decline in market share.

On the other hand, after the Russia-Ukraine conflict, Germany has found it difficult to obtain cheap energy from Russia, leading to a severe increase in energy costs; additionally, the previous measures to address population aging through immigration are facing increasingly sharp social conflicts, making it difficult to sustain. Therefore, the German economy still faces many medium-term challenges, the fiscal transformation may only be the first step in the transformation of the German economy.

At the same time, as a manufacturing powerhouse, investment's share in GDP in Germany is not high. Since entering the new century, Germany has maintained low infrastructure investment for a long time, especially in recent years, where investment in roads and inland shipping has been severely insufficient, leading to a decline in logistics performance index.

From a credit perspective, investment in transportation, warehousing, and communication has long been volatile and mostly negative growth. In terms of manufacturing credit structure, credit growth across various industries has been basically synchronized, showing a top-down driving effect, lacking credit growth driven by bottom-up industrial transformation. This fiscal stimulus plan is precisely a proposed solution to these structural deficiencies.

Valuation Repair of German Stocks Basically Completed

In terms of the stock market, Guotai Junan believes that the current round of valuation repair for German stocks has basically been completed. The German DAX index mainly covers technology, industrial, and financial blue-chip stocks. Historically, the valuation center of the DAX index is around 15 times, and the current market valuation has been repaired from undervaluation to a historically neutral level.

From the perspective of PB-ROE, the current PB of the German DAX index is about 1.9 times, with the latest ROE around 10.9%, which is basically in line with valuations in other global markets (excluding the two obvious outliers of the US stock market and the Indian stock market). Considering that the earnings of the German DAX index are still at the end of a recession cycle, under strong fiscal stimulus policies, it is expected to open a new round of earnings recovery cycle, with subsequent index driving factors becoming more balanced, taking into account both valuation repair and earnings improvement.

From the perspective of capital flow, global funds continue to flow into developed markets, while emerging markets are in a stock rotation environment. Within developed markets, there has been a recent marginal outflow of foreign capital from the US, while European stocks are accelerating inflows, indicating that funds in developed markets are undergoing transatlantic repatriation.

In the German stock market, the capital inflow since 2025 has basically offset the capital outflow gap of nearly two years. From the structure of foreign capital, institutional funds are the main force. Since 2024, institutional funds have basically stopped flowing out of the German stock market, and since the beginning of 2025, there has been a significant acceleration of inflows. In contrast, retail fund enthusiasm remains relatively weak, which means there is still potential space for incremental funds in the German stock market in the future.

This article is mainly sourced from Guotai Junan's research report "Germany: Strategic Pursuit of Autonomy, Restarting Major Fiscal Policies," authored by Fang Yi.

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