Germany Just Dodged A Recession. And That Means You Can Kiss Your Fiscal Stimulus Hopes Goodbye

The good news is, Germany dodged a recession (again).

That’s also the bad news.

The Germany economy expanded 0.1% in the third quarter, data out Thursday showed. That means that despite a heinous factory slump, Europe’s growth engine skirted a technical downturn. Q2’s contraction was revised to 0.2% from 0.1%.

Consumers and government spending carried the economy last quarter, while exports rose and imports were largely unchanged. “Gross fixed capital formation in construction was up on the previous quarter [but] gross fixed capital formation in machinery and equipment was lower”, the federal statistics office said.

The death-defying, bullet-dodge comes as a surprise. Green shoots from Germany’s factory sector have been hard to come by. Even a better-than-expected factory orders report for September showed orders dropping 5.4% from the previous year, the 16th consecutive YoY decline. The manufacturing PMI is mired in its worst slump in a decade.

The “problem” with Thursday’s news is that it will likely embolden Berlin’s fiscal hawks (and there are a lot of them) who have pushed back against calls for stimulus.

Market participants view a fiscal push from Germany as one of the most potentially bullish catalysts for risk assets, but lawmakers have insisted there is no emergency and therefore no cause for a serious break with the country’s “black zero” fiscal policy.

The fact that the economy isn’t even in a recession (or at least not on a technical definition) will bolster that contention and harden the commitment to fiscal rectitude.

Investor confidence recently pushed to a six-month high. That’s reflected in the DAX, which came into this week shooting for a sixth straight weekly gain.

Who knows, maybe this marks a turning point for the world’s fourth-largest economy, but we’d be remiss not to note that irrespective of whether a US-China trade deal is ultimately realized, the damage from the 17-month-old dispute will be impossible to unwind entirely. And Germany is one of the hardest-hit locales in that regard.