2025 DAX 40 forecast: 22,500 or 17,000?
Multiple economic indicators point to increasing recession risks in Europe's largest economy, with both the Ifo index and PMI data showing significant deterioration in November.
What may the impact be on the German DAX 40 index in 2025?
November data reveals accelerating downturn
On Monday, Germany's closely-watched Ifo business climate index retreated to 85.7 in November from October's reading of 86.5, marking the fifth consecutive month of contraction. This decline follows a brief respite in October, which had marked the first improvement in nearly six months.
The current Ifo assessment component showed particular weakness, falling to 84.3 from 85.7, while the expectations component remained relatively stable at 87.2, down marginally from 87.3.
These figures align with government projections of a 0.2% gross domestic product (GDP) contraction for 2024, positioning Germany as an underperformer among major economies.
Services sector weakness compounds industrial concerns
The services sector, previously showing resilience, has now dipped into contractionary territory with a purchasing managers index (PMI) reading of 49.4, down from 51.6. This unexpected decline in services suggests economic weakness is broadening beyond the manufacturing sector.
These indicators point towards increased pessimism among German businesses, impacted by corporate restructuring announcements and geopolitical tensions.
External factors weighing on German outlook
The German economy, traditionally Europe’s powerhouse, faces multiple headwinds from international developments.
With 10% of German exports destined for the US market, particularly in the automotive sector, potential US tariffs could significantly impact trade relations.
American tax cuts and deregulation, combined with lower energy costs, might further erode German competitiveness. This could affect share trading, particularly in German automotive stocks.
Furthermore corporate investment decisions may increasingly favour US locations over German facilities, presenting a structural challenge to the economy.
Technical recession risks intensify
Historical patterns show the Ifo index typically lags behind short-term events, indicating potential further deterioration in coming months.
Recent political developments, including the collapse of the coalition government, add uncertainty until February's snap elections.
The combination of weak industrial orders and subdued consumption presents significant challenges for Europe's largest economy which may enter another technical recession at the end of 2024, its second since the pandemic.
Structural challenges versus cyclical factors
German policymakers appear to be following a familiar pattern of response to economic shocks: initial panic, followed by repression and complacency.
The current focus on upcoming elections may delay crucial policy decisions regarding defence spending and investment initiatives.
The need to identify and develop new growth sectors becomes increasingly urgent as traditional industrial strengths face challenges.
Intensifying international competition and weak demand continue to pressure the industrial sector, as evidenced by both PMI and Ifo survey data.
Market implications and trading outlook
The deteriorating economic indicators have implications for European equity markets, especially German stocks, which may face increased pressure as recession risks mount.
The technical picture suggests continued volatility in German financial markets through the winter months and into 2025.
The fact that multiple negative divergence can be seen since March of this year on the weekly chart, where the record highs seen since then have been accompanied by falling levels in the Relative Strength Index (RSI), doesn’t bode well for the bulls as it points to a potential swift decline.
DAX 40 weekly candlestick chart
The rising wedge formation since March may be followed by a sharp decline in early 2025 if a fall through the current November low at 18,813 were to occur. In this scenario, a retest of the long-term uptrend, which began in October 2022, at 17,500 and a retest of the August low at 17,025 may well be on the cards.
While the recent low at 18,813 underpins, though, another attempt at reaching the psychological 20,000 mark, perhaps before year-end, may well unfold. But even then, since the area around the 20,000 level is likely to act as major psychological resistance, the odds of a clean break through this zone being witnessed are slim. Were this to happen, however, the 22,500 mark may represent the next upside target for the DAX 40.
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