Second quarter German GDP was released this morning and it showed an alarming slowdown in growth in the European powerhouse. The German economy grew by just 0.1% from April to July, below expectations of a 0.5% figure, and well below a first quarterly growth figure of 1.3%. In addition, the eurozone’s second quarter GDP figure as a whole came in at 0.2% (from a Q1 figure of 0.8%). What is more, forward-looking data suggests there Germany can expect ongoing slower growth in the second half of the year.
The euro has rebounded from losses (against the dollar at least, though not against the pound) incurred as a result of these figures, so the market does not appear to be too concerned. But shouldn’t it?
Germany’s sharp slowdown will only adds further evidence that the global economy is stalling. We are seeing it in America, the UK, France; even Chinese growth slowed down last quarter. However, it may actually be because economies such as the UK and US teetering on the brink of a double dip recession that the euro has no suffered from today’s data. There is a real shortage of appealing currencies at present. Even the outperforming swiss franc is coming under pressure as a result of the Swiss National Bank’s plans to curb its strength.
It is no secret that a healthy German economy is essential if it is to drag the eurozone’s debt-laden nations out of their current crises. The German economy is export led and needs global demand to pick up, which seems unlikely at present. Germany’s willingness to continually bailout the ailing eurozone periphery, and perhaps even core nations such as Italy and France, will be tested to the absolute limit if Germany plunges back into recession. The market is typically less sensitive to eurozone data than to that of the UK and US, but with German growth now under the microscope this may now cease to be the case. Germany is currently the eurozone’s safety net, without this economy propelling it forward; bets on a euro collapse will undoubtedly increase.
Richard Driver
Senior Analyst – Caxton FX
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