Germany faces deep structural challenges (although it shares many of its woes with the rest of Europe), including dependence on external energy, a rigid labour market, an ageing population, and slow digitalisation, leading to deindustrialisation, and a loss of competitiveness.
This economic stagnation drives political instability, with early elections set for this weekend after Olaf Scholz’s traffic light coalition collapsed in November 2024. Polls point to an unprecedented potential coalition government between the CDU and AfD parties.
Disconnect between the DAX and the domestic
However, the DAX has surged over 50% in two years, showing a clear disconnect from domestic economic conditions. A key factor is Germany’s strong global presence - after the US and Japan, it ranks third in foreign direct investment. Major German companies generate most of their revenue abroad: SAP (86%), Siemens (85%), Mercedes-Benz (78%), and Bayer (82%) to name a few.
Another factor behind the DAX’s surge is the index’s adjusted valuations. As of last week’s close, the index had a price/earnings (P/E) ratio of 17.08x, according to iShares. The Germany Mid 50 (MDAX), which includes more domestically focused mid-cap firms, had a lower P/E of 15.34x.
The MDAX is making a strong comeback, up over 10% since the beginning of 2025 and surpassing its 2024 high of 27,644 points, which is the upper band of a prolonged range-bound movement This coincides with a sharp recovery in ZEW analyst confidence, with the centre’s economic sentiment indicator jumping 15.7 points in February 2025 to 26, its highest level since July 2024. The survey indicates that hopes for a new government with decision-making capacity could be driving these gains.
This improving sentiment and a potential Ukraine ceasefire reducing geopolitical risk may be the main catalysts for the MDAX’s rise. If the index consolidates above 27,644 and political instability eases, Germany’s economic struggles could be nearing an end.
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