While the European industrials sector faces significant global macro challenges, Germany’s attempts to kick-start its economy look set to have a positive impact on industrials companies across the region, creating some potentially attractive opportunities for global equity investors.
Germany's stimulus: A catalyst for industrial growth
Driven by a massive increase in defence and infrastructure spending, tax cuts, and the release of billions of euros of new corporate investment, Germany’s stimulus package has provided a positive surprise to Europe’s growth outlook. Defence spending is the focus, given growing military threats, with Germany’s defence budget set to increase from 2.1% of GDP in 2024 to 2.5% in 2025 and 3.5% by 2029. This spending will boost demand for industrials companies, not just defence contractors, in Germany and across Europe.
Perhaps of more immediate significance for the industrials sector, however, is that EUR 500 billion of the stimulus package has been allocated to an infrastructure fund to be invested over the next 10 to 12 years. The spending will be focused on three main areas:
- Climate and energy transformation: EUR 100 billion to be spent in EUR 10 billion increments per year over the next 10 years.
- Regional infrastructure projects: EUR 100 billion to be spent over the next 12 years at the discretion of regional state governments (Laender).
- Federal government projects: EUR 300 billion to be spent on rail, education, housing, roads, research & development (R&D), hospitals and digitalisation.
At the federal level, more than half of the spending is expected in the next four years. Our best estimates of where we think the funds will be spent include EUR 80 billion on rail by 2029, with EUR 9 billion up front in 2025. The rail budget is significantly up from the German government’s initial 2019-2029 plan, which earmarked EUR 52 billion for the railways, providing a positive surprise to the rail sector. We also expect EUR 25 billion of federal funds to be allocated to hospitals and EUR 12 billion to be spent on housing.