Germany keeps on delivering bad economic news and its bad for the rest of Europe. The only twinkle of light is that things weren’t as bad as some expected.
The bottom line is that Europe’s largest economy, which is generally seen as the European Union’s engine of growth, shrank in the first half of the year.
“GDP data for Germany showed that the economy stagnated in Q2 and contracted slightly less than previously estimated,” according to a recent report from London-based consulting firm Capital Economics. “The big picture remains that the German economy has shrunk in the past nine months.”
the report also adds that it was the worst performer in all of the ,major economies of the single currency area known as the euro zone. For instance, France and Spain grew 0.5% and 0.4% respectively, according to the Capital report.
“Germany has been the weak link in the eurozone but France and Italy are quickly catching up, writes Win Thin, chief global currency strategist at banking company Brown Brother Harriman in New York. He adds that Spain’s economy will likely also slip into a recession sooner or later.
Should this surprise anyone? Probably not.
First, without Germany the EU economy won’t stand much of a chance of growing longer term. That is unless the economies outside Germany change the makeup of their economic structure.
Still Germany is in bad shape. It’s a country that relies heavily on exports of manufactured goods to the rest of the world. However, declining inflation-adjusted salaries across much of the world, along with rising energy costs for German factory owners have been a double whammy for the German economy.
Manufacturing growth fell to 2% in May, down from a recent peak of 5.4% in September last year, according to data from Trading Economics.
Meanwhile, energy costs, which peaked in 2022 at 700 euros ($770) per megaWatt hour, have fallen to 77 euros, still above the pre-pandemic level, according to data collated by website Trading Economics.
If the German economy was in any way healthy then we could have expected that falling energy prices would give big industry, of which Germany has plenty, a boost. But obviously that hasn’t happened, at least not yet.
Inflation also means that consumers across the rest of Europe and elsewhere have less spending power to buy consumer goods, such as cars, washing machines and refrigerators.
There’s also further evidence that Germany is unlikely to bounce back anytime soon. The European Central Bank may soon pause its efforts to fight inflation with interest rate hikes, experts say.
ECB chief Christine Lagarde said last month that the central banks isn’t considering pausing, write BBH’s Thin. “However, the fact that she mentioned it suggests that the ECB is actually “thinking about thinking about” pausing,” he writes and notes that the current market pricing of interest rates could confirm this.
“Believe it or not, it’s quite possible that the ECB stops hiking before the Fed does and that would be negative for the euro,” he writes.
Put simply, get ready for some possible major currency moves in the near future.
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