WeeklyWatch – Will the German elections turn the economic tide?

25^th February 2025

Stock Take

Germany’s results are in – is this the start of tensions easing?

The German election results brought some ease to the political uncertainty over the weekend, resulting in the country’s equities to open the week higher.

The biggest party to emerge was Friedrich Merz’s conservatives, which placed Merz as the next chancellor. The far-right Alternative for Germany (AfD) also had a strong night, winning a record number of seats and finishing second. Olaf Scholz and the Social Democrat Party (SPD) faced disappointment by coming in third.

Now that he’s officially the leader of the largest party, Merz will be looking to form a coalition government. He’s ruled out working with the AfD, meaning that it’s probable that he’ll seek out a coalition with the SPD. With their results combined, the two parties will have a small majority, having 328 out of the 630 parliamentary seats.

How will the German political results impact national and international markets?

While the immediate focus will be on coalition negotiations, a possible consequence could be an increase in European defence spending. This was implied in Merz’s victory speech, where he stated:

“Step by step, we can really achieve independence from the US.”

However, the reality of being able to make impactful fiscal changes in Germany – and influencing the wider European market – may be quite limited due to Germany’s sluggish economic performance. Plus, Merz’s conservative party and the SPD don’t have the two-thirds majority required to overturn the constitutionally enshrined debt brake, giving the government little fiscal flexibility.

UK deflated by latest inflation figures

Last week, January’s CPI inflation figures were released and revealed a 3% increase in prices over the previous 12 months – this was up from 2.5% in December.

Since September, UK inflation has been steadily rising, and January marked the first time CPI inflation hit 3% since March 2024. The cost of living continued to increase as a result of rising food prices, plane fares and the introduction of 20% VAT on public school fees, which was brought in at the start of 2025.

There has been little to no economic growth in the last few months, prompting fears of possible stagflation (a period of high inflation alongside weak growth). Commenting after the data was revealed, the Governor of the Bank of England, Andrew Bailey, said:

“It’s quite hard to work out to what extent the weaker growth story is a result of supply-side weakness or supply-and-demand-side weakness.”

As the government contemplate the situation and form their response, Chief Investment Officer at BlueBay Mark Dowding sees the UK’s current economic position as rather bleak:

“As it stands, we would assess the UK is already at risk of breaching its OBR rules on the budget, and this assessment itself is heavily dependent on eye-wateringly optimistic projections for rapid productivity growth. Consequently, this leaves the government with little room for manoeuvre or scope to massage the calculations to paint a rosier picture.”

With the likelihood of higher inflation figures on the horizon, it came as little surprise that the FTSE 100 fell 0.84% last week.

Uncertainty in the US

US equities struggled significantly last week. The S&P 500 suffered its worst day of the year on Friday when it dropped by 1.7%. In sterling terms, the S&P 500 was down 1.8% by the end of the week, and there was a fall of 2.65% for the tech-heavy NASDAQ Composite.

The USA’s own markets suffered from weakened business sentiment, which came about as a result of disappointing inflation figures from the previous week. Plus, the continuous uncertainty surrounding possible tariffs fuelled concerns about the nation’s economic strength.

Continued Chinese market success

China started the year off strongly and have sustained it. The Shanghai Composite rose by 0.96%, with tech and auto companies leading the rally.

The Head of Asia & Middle East Investment Advisory at St. James’s Place, Martin Henecke, commented on the figures. He said:

“The China tech stock rally serves as a good reminder that unpopular markets can experience turnarounds swiftly. The stars aligned for this sector last week, from Xi Jinping taking a more supportive stance – and meeting executives including Jack Ma – to strong earnings reports. However, investors might be well advised to manage concentration risk carefully by considering opportunities beyond just technology and AI.”

Wealth Check 

Balancing present and future financial plans

We always want to ensure that we’re making the right financial decisions that will benefit our loved ones – both now and later in life when we’re no longer around. Later-life and legacy planning can often make you feel like you’re being pulled in multiple directions! While it’s important to plan ahead for the future, we also need to focus on the present.

Assisting loved ones when there’s more pressure on household budgets is great, but this needs to be balanced with ensuring that you have enough money yourself to be financially secure as you get older.

This can feel like a bit of headache, but with diligent planning and advice, you may be surprised at how much can be achieved.

Adapting to make your financial plans a reality

As part of the Autumn Budget, it was announced by the Chancellor that unspent pensions pots are now proposed to be counted as part of an estate and taxed. For many, they had planned to pass these on tax-free and as a result could face higher Inheritance Tax bills than they first thought.

But there are still ways you can leave your money to younger generations. Here are our tips:

• Take advantage of your annual gifting allowance. You can gift up to £3,000 per year (£6,000 for couples) tax-free, which can help reduce the size of your estate over time.
• You can make a gift of over £3,000, but be aware that if you pass away within seven years of the gift, it may still be considered part of your estate.
• Regularly support your loved ones. Contributions to help with childcare or school fees gifted from disposable income can be Inheritance Tax-free.
• Take out a Lifetime Assurance policy. This can help cover any eventual Inheritance Tax bill.
• Utilise trusts. These not only offer tax advantages, but they also allow you to maintain control and protect family wealth from risks like divorce, bankruptcy or irresponsible spending.

Many are exploring regular gifting as a way to move money across generations. This type of ongoing gifting is a thoughtful, practical way to help out during your lifetime, while reducing the size of your estate.

Getting support and advice from a financial adviser can help you feel confident you’re making the right decisions – for now and the future.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

In The Picture

Increased inflation and pint price. Are your savings keeping up?

Inflation dropped in 2024, but now it’s increasing again – the effect of which means that over the past 20 years, household items have more than doubled in price.

During this period, it’s unlikely that cash ISA interest rates have kept up with inflation, meaning that the purchasing power of your savings may be fading away.

Investing in a diversified portfolio of assets, including equities and bonds, has shown to be the best way to outpace inflation over longer periods of time. But it’s always key to remember that investing comes with risk.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP Approved 24/02/2025