Fast reading
- Germany has flexibility to pull both monetary and fiscal levers to encourage economic growth. Its 2024 net debt to GDP stands at 44.5% while Europe’s is 74%. This compares to US net debt to GDP of 98% in 2024.
- Amid renewed interest in China, investors looked to the annual National People’s Congress (NPC) in Beijing for clarity on policy plans. Key takeaways include an expanded fiscal package, raising the official deficit target to 4% of GDP, commitments to boost consumption, and plans to nurture high-end manufacturing.
German lawmakers passed a historic spending package this week, potentially unleashing hundreds of billions of euros in debt financing for defence and infrastructure spending in Europe’s biggest economy.
Incoming conservative chancellor Friedrich Merz – with the support of likely coalition partners the Social Democrats – led the push to create a €500bn fund and relax the country’s strict debt rules. The package received the backing of 513 MPs on Tuesday, with 207 voting against, and no abstentions. The minimum required was 489 votes.
“This is an important step forward for Germany and the rest of Europe,” says Peter Smith, International Equity Strategist, Federated Hermes.
Germany has flexibility to pull both monetary and fiscal levers to encourage economic growth. Its 2024 net debt to GDP stands at 44.5% while Europe’s is 74%. This compares to the US with a net debt to GDP of 98% at the end of 2024, a figure expected to grow to 101% by the end of this year.
Europe is emerging as a viable alternative destination for investment with the expected uplift in future growth
“Following the announcement of the historic spending bill in Germany, there’s been a rerating in Bunds and upgrades in German and Euro Area growth forecasts across the board,” says Orla Garvey, a Senior Portfolio Manager, Federated Hermes Limited. “Europe is emerging as a viable alternative destination for investment with the expected uplift in future growth.”
The yield on the 10-year German Bund has risen 14.5% since the start of March1. Germany’s blue-chip DAX Index is up 15.5% YTD2.
“Germany’s shift to an expansive fiscal policy promises to revive Europe’s largest economy after two years of contraction. We think there’s more positive news to come. We see a push to reduce regulation and increased spending by other European countries,” Smith says. “China’s recovery will also help Germany given its strong bilateral ties with that country compared with its European peers. The threat of tariffs still looms on the horizon, but it’s good to see that Europe is looking at a different playbook this time around.”
Figure 1: Hang Seng China Enterprise Index vs. the S&P 500 YTD
Can the China rally sustain?
Chinese equities have fared well this year, supported by cut-price valuations and optimism that the country’s artificial intelligence industry could rival that of the US. The Hang Seng China Enterprise Index is up 22.7% YTD3.
Amid renewed interest in China, investors looked to the annual National People’s Congress (NPC) in Beijing (5-11 March) for clarity on policy plans.
Beijing has set a real GDP growth target of 5% for 2025 – the same as last year – which suggests that policymakers intend to maintain growth momentum with various policy tools, as they grapple with escalating US trade tensions.
Key takeaways from the NPC include an expanded fiscal package, raising the official deficit target to 4% of GDP, the highest in more than three decades and up from 3% last year; commitments to boost consumption by increasing household income and hiring; and plans to nurture high-end manufacturing and technologies such as AI and robotics.
On top of this, financial authorities in Beijing on Sunday released a 30-point ‘special action plan’ with priorities including boosting incomes, halting the fall of property prices, stabilising the stock market, and providing child-care subsidies. Local governments have also been ordered to expand domestic demand.
“Unlike the sudden policy pivot in September, the lack of substantial positive surprises from the NPC and commitments to support domestic demand to offset any trade headwinds mean that investors will be encouraged to shift focus from policy-driven sentiment to company fundamentals, such as profit margins and earnings,” says James Cook, Investment Director, Emerging Markets, at Federated Hermes Limited.
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1 Bloomberg as at 20 March as at 15:00 GMT.
2 Ibid
3 Ibid
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