Markets Cycles Part 2: Germany Dodges a Recession

In the previous instalment of this three-part series, we were awaiting a definite conclusion regarding a potential German recession. The country’s official statistics show that the fourth quarter of 2018 experienced neither a decline nor an increase in GDP, having brought Europe’s biggest economy to a standstill. After decreasing 0.2% in the previous three months, Germany by the smallest possible margin managed to avoid a technical recession, and markets reacted in accord. The DAX, after suffering severely due to concerns about a negative fourth quarter (falling 4.5% between the 6th and 8th of January), made a steady recovery (gaining4.3% between the 11th and 15th of January), since official statistics calmed market fears.

Although the worst case scenario has momentarily been avoided, this sequence of events, ending with stagnant GDP growth raises concerns for the state of the European continent as a whole. This places the responsibility on the European leaders to react appropriately with policy, thus avoiding a crisis resultant out of a slowdown.

Germany specifically has been dragged down by the weakening position of its Manufacturing Industry. Its weakening external demand, political uncertainty and ‘one-off’ economic hits has resulted in factory numbers significantly declining despite a strong opening half of 2018. Frederik Ducrozet, economist at Pictet Wealth Management, had several key factors to point to when speaking to the Financial Times on the matter. He stated that, “there is little doubt that several transitory factors have weighed on activity in 2018, including car regulations, low water levels in the Rhine, disruptions in the chemical industry, long weekends, vouchers, you name it. However, our presumption is the main driver of underlying weakness in the German economy has been the slowdown in Chinese growth and trade with Europe.”

Currently, Germany is expected to expand in this coming year, though at a slower rate than in recent years. Unemployment is at its lowest level since the German Unification, the expectation therefore being that weaker exports can be compensated by larger economic spending. Ana Andrade, Germany analyst at the Economist Intelligence Unit stated that; “Risks to the economy in 2019 are mainly external and geopolitical. It if turns out to be [worse] than expected we believe the government would be willing to provide some fiscal stimulus. It is very well placed to do so.”

Editing by Tom Handels