As the global slowdown narrative gathered adherents over the past several months, Germany became a veritable obsession for those inclined to believe the world was about to plunge headlong into the economic abyss.
To be sure, there’s been no shortage of fodder for the pessimists when it comes to perpetuating the German recession story. It feels like every day brings another disappointment on the data front and both the IMF and EC recently delivered sharp cuts to their outlook for Europe’s most important economy.
“With world trade and global economic growth cooling down this year and next, export growth is unlikely to soon regain the dynamism of 2014-2017”, the EC wrote last Thursday, adding that “high frequency indicators point to a continued deterioration in business sentiment in the manufacturing sector, with declining orders and a worsening export outlook.”
Read more on Germany’s economic stumble
From Germany To Down Under, Global Slowdown Narrative Finds Validation
Aaand It Just Keeps Getting Worse For German Manufacturing (And French Services)
Given all of that, and given the generalized economic malaise that appears to be asserting itself across the pond, markets were watching closely to see whether Thursday’s read on Q4 GDP would show Germany joining Italy in a “technical” recession.
The good news is, Germany avoided falling into a recession in Q4. The bad news is, Europe’s economic engine dodged a downturn by the slimmest of margins, as growth flatlined, disappointing consensus expectations that saw Germany rebounding from Q3 to eke out 0.1% growth.
As you can see, growth for the euro-area more generally was muted (again) at 0.2%.
“Today’s preliminary GDP print confirms that the German economy failed to rebound strongly after the dip in Q3 18, finishing H2 18 on the brink of technical recession”, Barclays writes on Thursday, adding that “idiosyncratic factors were still at play” during the quarter. The bank expects a domestic demand-driven “meaningful rebound” in the first half of 2019, but acknowledges that the risks are myriad. As such, there’s material downside to their growth forecasts for Q1 and Q2. To wit:
The external backdrop will likely remain challenging with trade jitters and slowing global demand leading to business confidence deterioration. Moreover, we see economic uncertainty stemming from Brexit, bleak EA growth prospects, China slowdown and ongoing US-Sino and potential US-EU trade disputes as the main source of risk in H1 19 — which might push households and businesses to delay spending and investment.
As ever, you’re reminded that this comes just as the ECB has ended net asset purchases. The combination of uninspiring growth and gathering geopolitical storm clouds has led many observers to suggest that the central bank will ultimately be forced to push the first rate hike even further into the future and roll out another round of TLTROs sooner rather than later, especially given how tenuous the situation looks in Italy.
It goes without saying that any decision by the Trump administration to move ahead with auto tariffs risks exacerbating things at a delicate juncture.
When Germany does go into recession, it’s bad news for the entire EU. After all, who else is left to pick up the bar tab?