Weapons Spending Around The World, And Why The German Stock Market Jumped The Gun

One massive impact the Trump administration has already had, DB’s Jim Reid writes in his latest Chart of the Day note,
is to upend decades of German fiscal conservatism (although one can debate whether Zelensky’s meltdown in the White House at the end of February was staged precisely to provoke Trump’s response, so that the outgoing German government can ram through the massive, €1 trillion spending package before the AfD would block it for good). 

However their tariff actions are also further denting one of Germany’s key sectors, namely autos. This morning we launched an additional paper in our new Deutsche Bank Research Institute looking at how Germany could encourage resources to move between Autos and Defence as the former scales back and the latter rapidly grows. See it here.

Today’s Chart of the Day from Reid shows how far Germany lags many of its peers in terms of defense spending so there is plenty of scope for change.

At the same time, auto factories have chronic overcapacity, with many operating at just a quarter of capacity and urgently looking to reduce their workforce. Production is down by almost a third from its peak in 2011, as much of it has shifted abroad and as buyers pick cheaper alternatives to German cars.

Retooling auto factories is easier said than done though, so it will take several years, even after orders are received. And the clusters of auto and defense factories are in different parts of the country, limiting the ability to simply update machinery and swap workers from one line to another.

The good news, according to Reid, is that with the right incentives and reforms there can be some transition between the two. 

The bad news is that the German (and European_ market has already priced in much if not all the upside from the massive, €1 trillion spending binge, when in reality it will take years for the money to flow through to where it can be used productively and end up as revenue and profits across the private sector, which means that European stocks – and the euro – are in for a very rude awakening in the near-term.