A monthly German survey, which
covers around seven thousand firms, has been released this morning to reveal
that German business confidence has declined for the fifth consecutive month. A
flat reading was expected but German business confidence has now dipped to its
weakest level seen since March 2010. The news provides further evidence of the dampening
effects of the eurozone debt crisis on the region’s powerhouse economy and has accordingly
weighed on the single currency today.
Firms in manufacturing, construction,
trade and industry were mostly responsible for the poor climate reading, though
retail and wholesale trade did improve slightly. The regional downturn is
having a particularly noticeable impact on Germany’s exports to other eurozone
nations. The economic weakness being seen in major nations like Spain, Italy and
even France cannot be viewed in isolation; recessions are particularly contagious
in a currency union like the eurozone and this morning’s data indicates that Germany
is succumbing.
Interestingly though, an economist
from the producers of the data - the Institute for Economic Research - has
stated that German consumption remains robust despite a weaker labour market
and therefore does not see a need for an interest rate cut from the European
Central Bank. An interest rate cut would however weaken the euro, which could
boost exports outside the eurozone, though this would require Germany’s
preoccupation with high inflation to be set aside. The IFO economist did also note
that the survey was taken prior to the positive decision from the German Constitutional
Court earlier this month, the uncertainty surrounding which may be at least
partly responsible for the unexpected decline.
The economic downturn is not just bad
news for Germany but for the eurozone’s peripheral nations as well. If Germany
enters recession, then it is going to be increasingly difficult for Merkel to
justify and deliver the support she is pledging for struggling nations like
Spain and Italy. With plenty more austerity measures still to come across the
eurozone, the prospects for the economy as a whole and Germany by association,
are rather gloomy. After Q2’s 0.3% GDP growth, Germany may avoid economic
contraction in Q3 but the same is unlikely to be true in Q4, such is the downtrend
that is in place. This is not to say that Germany is certain to enter a
recession but the risks are very significant and it is looking increasingly likely,
which is bad news for all concerned.
We may have seen some progress on
the debt crisis in the last month or so but economically, the region is in very
poor shape indeed, which is in part why we maintain a negative outlook for the
euro.
Richard Driver
Currency Analyst
Caxton FX
