China Drops a Hammer on Germany's Fragile Growth

Europe can't catch a break these days. Even when the spotlight turns away from the region's ongoing recession, European stocks have felt the blowback of volatility around the world. That was certainly the case this week, as Germany's DAX (DAXINDICES: ^DAX  ) stock index fell 4.2%, a casualty of stimulus-tapering fears in the U.S. and the worsening slowdown in China. Even Germany's power as Europe's unofficial economic leader has begun to wane. Is Europe's leading economy still staying strong for investors in the midst of the EU's economic drought?

Trouble at home and abroad
Germany's economy revolves around exports. Favorable trade advantages and the country's manufacturing power have kept Europe's top economy out of the recessionary climate that has engulfed Europe. In fact, Germany's reliance on exports is even more significant than some of the leading export-heavy nations in the world. The country exported nearly $1.5 trillion worth of goods last year, according to the CIA World Factbook -- just $200 billion less than the U.S. and $500 billion less than China, two nations with much larger GDPs. Among the top 10 largest economies, Germany exercised the largest export-to-GDP ratio in 2012.

China's manufacturing decline and credit crunch are thus a serious worry for Germany's continued economic strength. Outside of other European nations, China is Germany's second-largest export partner behind only the U.S. -- Germany racked up 67 billion euros' worth of exports to the world's second-largest economy in 2012. If demand for goods in China slips -- and that's certainly a possibility, given manufacturing's contraction across the Pacific and the flow of cash away from China -- the crunch will threaten Germany's export economy. The EU's war of words with China over trade and dumping will only exacerbate that problem unless the two sides can calm down.

Germany's position in the EU isn't helping, either. Harder-hit nations such as Italy and Spain still begrudge Germany and its heavy-handed, austerity-imposing response to the recession. Now Turkey has joined the chorus of distraught European nations: The country's ongoing protests and riots, as well as Turkish-German diplomatic relations, are souring fast. Germany reportedly blocked EU talks involving Turkey's membership bid on Thursday, and if this row intensifies, Germany's standing in its own backyard will continue to worsen.

This all adds up to a risky bet for the German economy, which hangs on to growth by a thread. Leading German manufacturers are also in danger while exports are at risk. Siemens' (NASDAQOTH: SIEGY  ) stock plunged more than 5% this week, as the global conglomerate's own Chinese business risks falling on the nation's downturn. Just a few years ago, Siemens' Chinese prospects were soaring, helped by the country's mass urbanization and need for manufactured goods and electronics. Now, however, the company's CEO says he sees "no momentum" from China, and the company has cut its sales outlook for this year. That's a bad omen for Germany from a diversified company often seen as a bellwether of the nation's economy.

China's slump is even worse for German companies relying on it for growth -- particularly within the auto industry. Luxury car makers are especially at risk. BMW (NASDAQOTH: BAMXF  ) said earlier in the year that it foresees Chinese sales slowing this year. BMW has done well in China in the past -- 2012 saw strong double-digit sales growth -- but competition from rivals and the economy's slump have put a damper on the company's optimism. Chinese domestic luxury-car companies are aiming at BMW and other luxury brands as well, adding another obstacle to BMW's future success.

One German auto firm that is poised to succeed, however, is Volkswagen (NASDAQOTH: VLKAY  ) . VW has thrived in China, becoming one of the nation's market leaders and growing its sales rapidly. While a Chinese slowdown could cut back on VW's sales, the firm's sizable market share -- it had a 20% market share in China earlier in the year -- will help VW see through any slowdown in the overall market while holding on to its spot in the industry. If investors are looking for one manufacturing stock in Germany that won't be slowed down, this is it.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

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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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