Last Friday, Germany’s central bank reduced the country’s growth and inflation forecasts for 2016. At the same time, the Bundesbank emphasized that strong domestic demand and a shrinking labor market would continue to add strength to the Eurozone’s largest economy.

Such a forecast is along predictable lines since Germany has remained the economic bloc’s strongest performer over an extended period. Other data released recently also indicate that its status as the region’s economic leader is unlikely to change quickly. Adding stocks from Germany to your portfolio would be an extremely prudent option.

Domestic Demand to Drive Growth

According to the Bundesbank, Germany’s GDP is expected to increase by 1.7% this year and 1.4% in 2017. This is lower than respective estimates of 1.8% and 1.4% released in December last year. However, growth is expected to rebound in 2018 and come in at 1.6%.

However, the central bank’s president Jens Weidmann said that such a downward revision was not a reason for great concern. Weidmann emphasized that the economy is on a “relatively firm” footing. The reduction in growth forecasts was mostly attributable to lower demand for the country’s exports. However, this is being viewed as a positive development for an economy often believed to be reliant on external demand.

Weidman was quick to emphasize that strong domestic demand would be the bedrock for economic strength. Such a level of demand would be a product of higher household income and a healthy labor market.

GDP Rises in Q1

An increase in domestic consumption was the major reason for a rise in Germany’s first quarter GDP growth. According to official data released last month, the country’s economy grew by 0.7% in the year’s first quarter. This is twice as high as the rate of 0.3% experienced in the last quarter of 2015. 

The country’s economy has experienced growth for seven consecutive quarters since 2014. Several market watchers believe that the country has gained from the ECB’s monetary stimulus measures. Additionally, the country’s central bank has reduced the country’s inflation forecast for this year from 1.1% to 0.2%. This is largely a result of a decline in oil and commodity prices.

Are Structural Reforms Imperative?

Meanwhile, Germany’s labor market looks increasingly stronger. In May, the country’s adjusted unemployment rate declined to an all-time low of 6.1%. However, the country may face some challenges on this front with a considerable number of immigrants poised to enter the country this year.

The larger concern has been Germany’s unwillingness to undertake structural reforms. Such changes are primarily related to pensions and taxation. Additionally, the country needs to make a significant increase in investment on infrastructure. These may become imperative for a country viewed as a vocal advocate for radical reform.

Our Choices

Despite a few impediments which could hinder the economy in the long term, Germany remains the strongest economy in the Eurozone. If appropriate interventions are undertaken in the near future, even these roadblocks could cease to become a hindrance.

This is why it is important to consider companies from Germany while picking stocks for your portfolio. Even then, picking winning stocks may be a difficult task.  

We have narrowed down our search to the following stocks:

Volkswagen AG (VLKAY - Snapshot Report) is a manufacturer and seller of automobiles worldwide.

Volkswagen has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 8.68, lower than the industry average of 8.91. Its earnings estimate for the current year has improved by 6.2% over the last 30 days.

Deutsche Post AG (DPSGY - Snapshot Report) provides logistics and mail services primarily in Germany, Europe, America, Asia Pacific and Other regions.

Deutsche Post has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 66.9% for the current year. It has a P/E (F1) of 13.18, which is lower than the industry average of 21.31. Its earnings estimate for the current year has improved by 3.8% over the last 30 days.

BASF SE (BASFY - Snapshot Report) is a leading chemical company with global operations.

BASF has a Zacks Rank #1(Strong Buy) and a VGM Score of B. It has a P/E (F1) of 14.72, which is lower than the industry average of 42.50. Its earnings estimate for the current year has improved by 13.4% over the last 60 days.

Deutsche Telekom AG (DTEGY - Snapshot Report) is one of the largest communications carriers worldwide.

Deutsche Telekom has a Zacks Rank #2 and a VGM Score of A. It has a P/E (F1) of 17.44, which is lower than the industry average of 26.10. Its earnings estimate for the current year has improved by 4.1% over the last 60 days.