Germany is in danger of a Technical Recession

Germany reported a contracting of their economy in the Q2 of 2019, the first such contraction in years. The GDP decline puts Germany in jeopardy of a technical recession this year which is defined as 2-consecutive quarters of negative growth. This is in contract with overall European growth which increased by 0.2% in the Q2.  

Why did Germany Growth Contract?

The narrowing of GDP growth was driven by a decline in exports. Economists and government leaders blame the cool-down in Germany’s export-driven economy on the uncertainty caused by the US-China trade war. The health of Europe’s largest economy is vitally important to the rest of its partners, and German’s slump has already had an impact on its major trading partners including France which experienced an unexpected decline in industrial production in June.

Additionally, economic sentiment in Germany is at its lowest since the beginning of the financial crisis ten years ago. A potential no-deal Brexit, which is favored by the current U.K. government could further reduce economic growth in Germany. Germany reported that the German ZEW indicator of economic sentiment for Germany dropped to a -44.1 reading in August, which is the worst level since December 2011 and down from -24.5 in July. Expectations had been for a reading of -28. Additionally, the current situation index also fell, to -13.5, which is the worst since May 2010.

The German government reports that  economic growth is expected to rise by  0.5% in 2019, but it has refused to loosen its fiscal policy, still aiming to balance its budget year currently under the EU-imposed limit of 60% of GDP. You can track all the economic information that is released regarding German growth on the iFOREX broker economic calendar.

European Growth Came in as Expected

Eurozone reported Q2 GDP that came in as expected and remained steady at 1.1% year over year.  Since Germany is European largest economy, the decline in German growth will eventually spill over into European growth.  Eurozone June Industrial production showed sum cracks. Industrial production came in at -1.6% month over month compared to expectations that it would contract by -1.5% month over month.  The year over year rate sank to -2.6% from -0.8% in June. 

Italian Political Data Could Weigh on European Growth

Italy’s political drama could hamper stimulus that is provide by the European Central Bank.  It is likely that Prime Minister Conte will address Parliament on August 20, and a vote of confidence will likely follow.  Conte could resign, paving the way for open elections. 

US-Chinese Trade War Effecting Europe

China will no longer be embarrassed on a world stage. President Trump does not have a way to back out of his treats that a trade war is easy to win. The brinkmanship is getting scary and although there are problems in China, President Xi can quell these issues in a way that President Trump cannot. Additionally, President Xi is not up for re-election. Until this trade war is eased, growth throughout Europe is likely to contract.