Earlier this week, Germany confirmed that the fourth-largest economy on the planet shrank in Q2. It was the second contraction in four quarters.
The news was expected, but it contributed to an already downbeat mood among market participants, who were still digesting the worst read on industrial output from China since 2002.
By the end of the day, growth concerns had inverted the US 2s10s curve, sending the Dow plunging in the worst day of 2019.
Wednesday’s read on the German economy came on the heels of dour data point after dour data point, including Tuesday’s abysmal ZEW confidence print and a horrible read on the business outlook amid an acute manufacturing slump.
On August 8, Reuters reported that Germany might consider loosening up the fiscal purse strings, breaking an intractable fiscal logjam that’s bedeviled those calling for government spending to help take some of the onus off monetary policy when it comes to resurrecting the eurozone economy.
Subsequently, Angela Merkel’s spokesman played down the report, as did heir apparent Annegret Kramp-Karrenbauer, but it’s getting harder and harder to justify not spending when the domestic economy is clearly headed for a downturn and 10-year yields in Germany are deeply negative (top pane in the figure).
Robert Habeck, head of Germany’s ascendant Greens party, this week called Berlin’s obsession with budget discipline in the face of impending economic calamity “‘black zero’ voodoo”.
Fast forward to Friday and the market got the most definitive sign yet that Germany is, in fact, considering government spending to shore up the flagging economy.
According to Der Spiegel, Merkel and Finance Minister Olaf Scholz are prepared to run a budget deficit if (or, more likely, “when”) Germany falls into recession. The report cites unnamed sources in the chancellery and finance ministry.
Any shortfall in tax revenue from a downturn could be offset by new debt, the magazine said.
This cannot come fast enough for some market participants and it showed, as European equities bounced on the news, while bunds sold off.
Earlier this month , 30-year yields in Germany pushed into negative territory, as the country joined the Swiss and the Danes with totally negative curves.