The twin pillars of the German economy, industrial output and export, which shielded the European powerhouse and anchored the rest of the Eurozone during four years of intermittent crisis and uneven growth, appears fragile. The largest economy of Europe recorded a 4.0% month-over-month decline in industrial production in August. This was the steepest decline since the 6.9% drop during the global financial crisis in 2009.

The contraction in industrial production was most significant in the capital goods sector, which was once perceived as the growth engine of the country. To add to the woes, export orders decreased 8.4% and factory orders fell 5.7% during the month. These included a sharp 9.9% decline in bookings from outside the Eurozone and a 5.7% drop within the Eurozone itself.

The economic pointers indicate that perhaps all is not well for Germany. Indeed, the probability of a strong rebound in the third quarter after a 0.2% contraction in the second quarter appears to be very low. The dark clouds that currently hover above this European giant could have wider repercussions and bring jitters to the global economy as well.

What Ails the German Economy?

Although Germany has been the star performer during the Euro crisis, it is not completely immune to the regional factors that influence the economic parameters. The bulk of the country’s exports is made to the Eurozone, which is yet to find a solid footing after the sovereign debt crisis. A relatively low and sometimes non-existent regional growth hinders the growth prospects of the country and limits its export options.

In addition, other geopolitical issues like the economic sanctions imposed on Russia for its intervention in Ukraine, continued military actions against the Islamist terror in Syria and Iraq and sluggish growth from emerging markets of China and Brazil have also affected export demand. Moreover, Germany is struggling through its public sector austerity program to deliver on the promise of a “schwarze Null” – a federal budget that is in the black or fully balanced – in 2015. This had forced the government to empty its coffers for infrastructure investment in order to revive the economy and encourage domestic consumption.    

The Knee-Jerk Reactions

The International Monetary Fund (IMF) has reduced its growth forecasts for the country for 2014 and 2015 citing a slower-than-expected recovery of domestic demand. The IMF currently expects the country to grow at a pace of 1.4% this year and at 1.5% next year, down from its earlier respective projections of 1.9% and 1.7%.  

Several surveys to gauge the economic sentiments further portrayed a gloomy picture. The Ifo Business Climate Index, which is prepared by the Ifo Institute for Economic Research in Munich and is one of the leading indicators for economic activity in Germany, dropped to its lowest level since Apr 2013 to 104.7 points in Sep 2014. The manufacturing purchasing managers index (PMI) also fell into contraction zone for the first time since Jun 2013 at 49.9. This further implied a falling business confidence on the economy.

The Silver Lining

The German economy ministry has largely attributed the slump in industrial production to a massive 25.4% drop in auto output due to an unusual summer holiday pattern that led to simultaneous shutdowns at German car plants. School holidays started late this year and factories were mostly closed in August. This has reportedly contributed to a 2.9 percentage points decline to the overall industrial output for the month.

The retail sales of the country surprisingly increased 2.5% in August – the strongest since Jun 2011. With a relatively low jobless rate of 6.7%, rising income and low borrowing costs, domestic consumer spending is expected to be high and is likely to bail out the country from the perceived economic downturn.

3 German Stocks to Get Rid Of

Amid the current economic gloom, investors should be better off by discarding these German stocks that are backed by an unfavorable Zacks Rank and unimpressive long-term earnings growth rate.

Deutsche Bank AG (DB - Analyst Report): Headquartered in Frankfurt am Main, Deutsche Bank is one of the largest global financial institutions. It offers a wide variety of investment, financial and related products and services to private individuals, corporate entities and institutional clients around the world.

Earnings estimate revisions for this Zacks Rank #5 (Strong Sell) stock for the current year have been moving down. In the last 60 days, earnings estimate for the current year has declined by 3.9% to $3.65. The long-term earnings expectation of the stock is also pegged at a relatively low tally of 5.6% compared with an industry average of 11.4%.

Fresenius Medical Care AG & Co. KGAA (FMS - Snapshot Report): Founded in 1966 and headquartered in Bad Homburg, Germany, Fresenius Medical Care offers renal dialysis products and services through its network of 3,250 outpatient dialysis clinics in approximately 45 countries worldwide.

The long-term earnings expectation for this Zacks Rank #4 (Sell) stock is currently pegged at 7.6% compared with an industry average of 17.3%. In addition, earnings estimate revisions for Fresenius Medical Care for the current year have been moving down, signifying negative investor confidence.

SAP AG (SAP - Analyst Report): Headquartered in Walldorf, Germany, SAP is one of the largest independent software vendors in the world and is the leading provider of enterprise resource planning (ERP) software. Its solutions are designed to cater to the needs of organizations, ranging from small and medium businesses to large, global enterprises.

Earnings estimate revision for this Zacks Rank #4 (Sell) stock for the current year has declined by 6.5% in the last 90 days to $3.71. The long-term earnings expectation of the stock at 9.8% is relatively low compared with an industry average of 16.0%.

Moving Forward

Analyst Carsten Brzeski at ING rightly observed: “The short-term outlook for the economy is very diffuse as the strong labor market and solid private consumption should be able to, at least partly, offset weaker industrial activity. Whether this will be enough to avoid a technical recession, i.e., another contraction in the third quarter, is with today's industrial production numbers too early to tell.”

However, with leading economic indicators appearing rather bleak, the outcome bodes ill for the broader 18-country Eurozone and Germany in particular. As the government tries to allay the fears with counter arguments, it could well sound like the proverbial ‘whistling in the dark.’