Sterling gained versus the euro on the interbank market this week, rising to around a two-week high. As explained in our GBP article, this is partly because the financial markets feel more hopeful that there’ll be a Brexit deal, following the UK/Ireland meeting yesterday.
Moreover, it’s also because Germany’s economic performance has remained downbeat, with factory orders and exports disappointing. There’s an increasing possibility that the Eurozone’s largest economy has entered a technical recession.
Looking forward, we’ll see if this affects the rest of the euro bloc, and if the European Central Bank (ECB) eases monetary policy again.
To begin, Germany’s factory orders fell by -0.6% in August month-on-month, said Germany’s central bank, the Deutsche Bundesbank, this Monday. This exceeded economists’ predictions for a -1.5% drop, yet follows July’s -2.1% decline. Moreover, on a yearly basis, Germany’s factory orders shrank by -6.7%, well beyond forecasts for -4.6%.
In part, this is because of Brexit uncertainty, as well as the USA’s and China’s trade war. Germany exports vast amounts to both the world’s largest economies, so it’s arguably been the biggest loser of Washington’s and Beijing’s decision to impose tariffs worth hundreds of billions on each other.
Elsewhere meanwhile, yesterday we learnt that Germany’s exports fell by -1.8% in August, similarly reflecting a shrinking appetite for German products outside the euro bloc.
Given this, it’s likely that Germany’s economy will have shrunk last quarter, between July and September. Already Germany’s GDP shrank by -0.1% in the second quarter, so if this true, Germany will enter a technical recession.
To relieve this, we’ll see if Angela Merkel’s coalition government will increase its spending, to shield German businesses from the worst effects of the trade war.
Since 2014, Germany has increased its public spending without raising its debt, thanks to a thriving economy. However, if Germany enters recession, then Angela Merkel may have to break her pledge not to borrow more money.
If Germany enters a technical recession, this will vindicate the ECB’s decision last month to further cut interest rates, and restart its extraordinary monetary stimulus.
However, looking forward, incoming ECB President Christine Lagarde may try to further cut borrowing costs in the Eurozone, to shore up its stagnating economic growth.
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