Can Germany Stave Off Europe's Economic Crunch?

Europe's ongoing recession is doing no favors for investors in the region's largest and strongest economy, Germany. The DAX (DAXINDICES: ^DAX  ) stock index inched up by a few tenths of a percent this week and has made strong gains over the past month, but Germany's economy is hardly a standard-bearer even among its worse-off European peers. Is the German economy still safe for your investment, or it this traditional European leader starting to slow?

Population falling, unemployment rising
Germany faces a population problem. The country has Europe's lowest birth rate, with just 1.36 children born per women. As with other advanced economies facing the same dilemma, Germany's declining population will eventually lead to fewer taxpayers and productive workers to support an aging population. The population drop has come even faster than feared: German census results released this week showed that the country's citizenry declined by 1.5 million people more than assumed, reducing its population to just 80.2 million people from a projected 81.7 million.

Still, Germany's youth, while declining in numbers, are much better off than their fellow Europeans. The country's youth unemployment stands at just 8%, whereas the worst-hit European nations struggle with youth unemployment well into the double digits. In Spain, more than half the country's youth is unemployed. Yet even German unemployment has been rising recently, marking a fourth straight month of increases in May, when the nearly 3 million people out of work far surpassed estimates. Combined with declining retail sales in April, the trend marks an ominous sign that Europe's malaise is spreading into its bastion of economic strength.

Europe's economic woes have been hitting German companies hard. Sporting-goods and clothing company Adidas (NASDAQOTH: ADDYY  ) has grown its profit and margins recently, but the company's sales lagged in the first quarter, particularly in Western Europe, where revenue fell by 6%. This week, Adidas attempted to prop up its lagging Reebok division -- which the company purchased for $3.8 billion in 2006 -- by rebranding the segment with the symbol of its highly successful CrossFit program. There's no telling whether that's enough to turn around unprofitable Reebok and boost Adidas' margins further, but CrossFit has become a big success as a fitness program in Europe and the U.S.

Capitalizing on CrossFit's success will be vital for Adidas if it wants to catch up with rivals such as Nike (NYSE: NKE  ) . Nike has beaten Adidas by growing revenue despite slowing sales in China and even managing to grow brand sales in Europe last quarter. Continued economic recovery in the U.S. should help both firms, but unless China and Europe can turn things around, Adidas may not have enough firepower to close the gap with its American rival.

Deutsche Telekom (NASDAQOTH: DTEGY  ) has also been looking to expand geographically in order to cement growth. Germany's top telecommunications firm is reportedly looking to purchase competition in Eastern Europe. According to The Wall Street Journal, it seeks to acquire GTS Central Europe, a Warsaw-based network provider, for more than $775 million. Deutsche Telekom has targeted Eastern and Central Europe as a major focus despite the region's economic sluggishness, and acquiring GTS is a way to pick up a data network in the region as Eastern Europe develops.

How can you invest internationally?
Investors are hopeful that German stocks can beat Europe's blues, but you don't have to go globetrotting if you want to diversify your portfolio geographically. Profiting from our increasingly global economy can be as easy as investing in the U.S. of A. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it's gone.

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Dan Carroll

Dan began writing for the Motley Fool in 2012. He is a health care specialist who also follows the defense industry along with tracking the broader U.S. and international markets.

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