What is the market outlook for 2024 in Germany?

9 minute read
30 January 2024

2024 has begun on a challenging note. Yet, as we approach the middle of the year, we foresee a revival in the transaction business. This anticipated resurgence, driven by a more stable interest rate environment and potential summer interest rate cuts, is expected to be seen in both private M&A transactions and public takeovers, particularly within the small and mid-cap segments. Furthermore, we project an upswing in capital market activity in the latter half of the year, potentially commencing as early as Q2.


Political crises

2024 will be a year of geopolitics. Elections will be held in around 70 countries, and conflicts threaten to spread to the region and beyond. Accordingly, the key uncertainty factors in 2023 will remain predominant in 2024:

The ongoing conflict in Ukraine

Conflict between Russia and Ukraine is also exacerbating economic uncertainties. The global consequences are still difficult to assess. Record commodity prices, disrupted supply chains and looming energy supply bottlenecks.

Middle East conflict

The Middle East conflict will also have a lasting impact on the economy, firstly in the affected region but also in Germany and the world as a whole

The geopolitical conflict in October 2023 led to turbulence in both the financial markets and oil markets. Higher risk premiums increased the financing costs for indebted countries, while the growing uncertainty drove many investors to look for safe havens, which was reflected in a permanently higher gold price, for example.

Elections in the USA

Uncertainty also prevails with regard to the outcome of the presidential elections in the USA. US politics may be dominated by the presidential election campaign and the numerous primaries. On 5 November, 2024, a new president will be elected, taking office in January 2025. It is possible that incumbent Joe Biden will have to run against Donald Trump again, although the latter will have to answer to several courts in various proceedings. In macroeconomic terms, the world's largest economy appears to be making a soft landing, as current data suggests that a recession as a result of the rapid interest rate hikes can be avoided.

Economic expectations

According to the Federal Statistical Office, Germany's gross domestic product fell by 0.3% in 2023 compared to the previous year. After the pandemic in 2020 this is the second decline in German economic output this decade. The main reasons for this development were the persistently high prices and unfavourable financing conditions. Weak demand at home and abroad also had a negative impact. Compared to 2019, the year before the coronavirus pandemic began, GDP in 2023 was only 0.7% higher.

Germany's most important economic sector, industry, had to contend with falling energy prices in 2023, which were still high compared to pre-crisis levels, as well as dwindling orders due to the interest rate turnaround. The industry's economic output fell by 0.4%.

Outlook for 2024

Energy prices are expected to fall further, and the interest rate turnaround has also ended for the time being. Forecasters expect some recovery in industry over the course of the year. So far, however, it appears that the consequences of the energy crisis will weaken the industry in the long term.

As a result, the issue of supplying industry (as well as the population) with energy in internationally competitive conditions will remain a key driver of overall economic development.

The fact that the German economy only shrank slightly in 2023 was mainly due to private consumption. Falling inflation - which averaged 5.9% for the year according to provisional figures - and gradually rising wages have driven people back into stores despite high energy prices. Nevertheless, price-adjusted consumer spending was 0.8% below the previous year's figure. In 2024, private consumption should account for the largest share of the economic recovery. Rising wages and social transfers should once again outstrip the further decline in inflation. However, it cannot be ruled out that rising consumption could drive up prices again. There has been little sign of the dreaded wage-price spiral so far, but the danger remains.

Interest rate environment

Central bankers have raised key interest rates by 450 basis points since July 2022 in order to curb inflation - faster and more sharply than at any time since the monetary union was formed. The rise in prices dampened consumption. Higher financing costs slowed down investment and plunged the construction industry into a crisis. Debtors are rushing to pay off their outstanding debts from the low-interest periods so that they do not have to replace them with high-interest loans. The supply of money to the economy is shrinking. And because the central banks in other countries have also raised their key interest rates sharply, German exports are also on the slide. However, the central banks have now managed to contain inflation. They have been supported by dwindling material shortages and falling prices on the commodity markets. However, interest rates will remain at a high level compared to the zero interest rate phase of recent years.

No boost from abroad

2023 was also weak because the hoped-for boost from abroad largely failed to materialise. The most important trading partners had their own problems to contend with, especially China, with the long-term effects of the coronavirus pandemic. German imports fell by 3.0% and exports by 1.8%.

In the USA, the most important foreign market for German exporters, there are signs of a slowdown following strong growth in the third quarter. Even though the feared recession has so far failed to materialise, this does not mean it will not come. In previous cycles, it took up to 43 months from the first interest rate hike to the start of a recession. So far, just 21 months have elapsed since the Fed's rate hike cycle started in March last year.

It is unlikely that China will pull the global economy out of the trough. Overcapacity in the real estate sector, falling house prices, high youth unemployment and over-indebted provincial governments have robbed the world's second-largest economy of some of its strength. China's economy will grow by 4.5% next year, half as much as 20 years ago. In the next ten years, the country will grow much more slowly, on average 2% or 3% per year. The German export industry is likely to feel the pain of this.

In any case, the risks for foreign business are high. The wars in Ukraine and the Middle East continue, with a risk of escalatation at any time; a conflict between China and Taiwan could unhinge the global economy. And if Donald Trump returns to the White House next year, a new wave of protectionism could threaten.

Market development - M&A and capital market transactions, real estate

In the M&A sector, we expect transactions in the small-cap segment in particular, which do not require significant debt financing, as well as in the strategic segment, triggered in particular by the disruptive drivers of digitalization, electrification, AI and ESG.

The stabilisation of interest rates should make it easier again for financial investors. in particular, to provide and utilise debt capital and lead to an upturn in the transaction business overall (especially in the large and mid-cap segment) (real estate, M&A, private equity).

From Q2 onwards, we expect an increase in rescue capital increases to create new equity. This applies in particular to the real estate sector due to the necessary revaluation or devaluation of the portfolio as at 31 December 2023, but financing via the capital market will also become more attractive again for other capital-intensive sectors (biotech) given the still comparatively high interest rates.

In the event of an overall economic recovery, IPO activity could also increase again from Q2 or after the summer break.

Public M&A opportunities in this segment could also arise from the still relatively low stock market valuations in Germany's small and mid-cap segment, especially in an international comparison, and lead to increased takeover activity. This expectation is further supported by the need to adapt business models, triggered in particular by the disruptive drivers of digitalisation, electrification, AI and ESG.

Topics that we will be focusing on in 2024

  • Implementation of the Future Financing Act in practice (How is the e-share performing? Do the changes to the law lead to the hoped-for revival and facilitation of corporate financing in Germany, both in the venture and capital markets?)
  • EU Listing Act
  • Further development of the ESG discussion, in particular
    1. Impact on corporate governance, shareholder activism and the 2024 AGM season
    2. EU directive on the due diligence obligations of companies with regard to sustainability EU Corporate Sustainability Due Diligence Directive (CSDDD)
    3. Effects on the transaction business (due diligence requirements, implementation in contractual practice/creation of new standards)

For further information, please contact Lars-Gerrit Luessmann.

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