Deutsche Telekom AG (DTE): 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 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 tojust 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 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.