On Saturday the 9th of November, 30 years ago, the Berlin wall came down and unified the modern-day economic powerhouse of Europe. It began an era of strong growth and even stronger industrial production, which made Germany one of the most dominant manufacturing nations in the world. However, it’s safe to say that Germany has been a casualty of uncertainty caused by both Brexit and the ever-lasting US-China trade dispute, with evidence emerging that manufacturing weakness is spreading to other areas of the domestic economy. German consumer confidence has declined to its lowest level since November 2016, and given the importance of consumption as a growth driver, there’s a chance that we might see permanently subdued growth in the future. Forecasts are aligned in the view that German GDP released this Thursday will once again post a 0.1% contraction, meaning the German economy is in a technical recession.
There is a chance, however, that we’re seeing a bottoming out in economic indicators. Forward-looking factory orders for September swung from a 0.4% decline to a 1.3% increase, and there was also a turnaround in the prospects for carmakers following nine months of decline. This will help policymakers in the German government that have sought to characterise the slowdown as a temporary effect of the trade war. To add to this, German exports also rose 4.6% in September, surprising many economists and raising hopes that a recession might be avoided. Andreas Scheuerle of Deka Bank noted that any decline in growth should be both too small and too sector-specific to characterise it as anything more than a ‘black eye’ for the nation.
Nevertheless, one month of decent figures doesn’t change the fact that a dose of fiscal stimulus might help the nation avoid a more serious contraction down the road. Both the European Commission and the European Central Bank have called on countries to spend more, and we’ve previously written that Germany’s debt-to-GDP ratio provides it with the ideal environment to do this. Admittedly, these calls have repeatedly fallen on deaf ears back in Berlin where German Finance Minister, Olaf Sholz, has commented that the country is in a stable economic position while retaining the ability to manoeuvre in the event of a genuine economic crisis. One thing’s for sure, we won’t know the exact health of the German economy until the walls of the trade war are finally broken.
Bottom line: It’s difficult to quantify the exact damage the trade war has and continues to have on European nations as they’re essentially ‘collateral damage’ in this entire ordeal. We still think that the slowdown will manifest more deeply in other sectors of the German economy, especially as there’s the lingering threat of Brexit continuing infinitum. Soft growth into next year could force the hand of the government into finally loosening its purse strings.
Sterling traded in a clear downward trend last week reaching lows of 1.2769 against the US Dollar on Friday afternoon. On a trade-weighted basis, the Pound sits near the bottom of its three-week trading range and is likely to be supported by the 1.28 figure against the US Dollar and 1.1550 against the Euro. Markets are waiting for the December general election, so short-term volatility is likely to remain low for Sterling, although a busy week for UK data may push Sterling outside its recent trading range.
Last week, the US Dollar Index rebounded off two-and-a-half month lows and broke through the 50,100 and 200-daily moving averages, closing above the 50-moving average on Friday. This places the US above some key support levels that could come into play this week. Monday is a US holiday, so low liquidity should be expected. Also, various Federal Open Market Committee members will be speaking throughout the week.
The trade-weighted Euro Index fell just shy of 1.0% last week, breaking through the 50-daily moving average reaching five-week lows. This followed several attempts from EUR/USD to break through the 1.1179 resistance level. The common currency reached lows of 1.1017 on Friday afternoon and opened London trading on Monday relatively unchanged. Major European data releases may be light this week, but the focus will be on Thursday’s German quarterly Gross Domestic Product reading which may result in Germany entering a technical recession.