Germany on the brink

GDP in Europe’s largest economy fell 0.1% in the second quarter and early signs for this quarter are ominous. Alex Rankine reports.

Germany is "teetering on the edge of a recession", says Andrew Kenningham of Capital Economics. GDP in Europe's largest economy fell 0.1% in the second quarter and early signs for this quarter are "ominous". The downturn has weighed on market sentiment. The Dax index, which contains 30 blue-chips, has shed 7% of its value since the start of July.

The global trade war is a serious problem for a country where exports represent a massive 47% of total GDP.As economist PatrickArtus tells Les Echos, the German economy is heavily weighted towards the automobile industry, chemicals and massive exports of industrial machinery to China. What's more, this economic model could nowbe faced with "obsolescence".

Too much of a good thing

Teutonic tightfistedness has global consequences, notes John Authers on Bloomberg. With so many savings chasing so few bonds, Europe has become ground zero for the global slide into negative bond yields. Those yields mean that the market is effectively begging Germanyto borrow and spend more. With inflation low and ahuge trade surplus withthe rest of the world there is ample headroom to do so.Yet Germany is "maddeningly averse to fiscal stimulus".

Constitutional rules ban borrowing to finance large structural deficits, notes The Economist, and the "black zero" commitment sees the government pledge balanced budgets. Conditions may need to worsen before German politicians are willing to turn on the fiscal taps, but that day may yet come. With European interest rates already so low, the central banking "toolbox is nearly exhausted".

As we pointed out last week, the ailing health of eurozone banks is another key economic concern. That said, much of the worry may already be in the price: on a cyclically adjusted price/earnings ratio of 17.6, German equities are now almost as cheap as Britain's. Any loosening of the purse strings in Berlin could spark a near-term rally. As for bonds, Germany remains a key barometer of the global economy and the centre of the current market madness. Investors should watch closely.

Will Argentina default yet again?

Argentina secured a $56bn bailout from the International Monetary Fund (IMF) in the wake of a financial crisis last year. Yet the prospect of an anti-market Peronist coming to power means that "a sovereign-debt default is increasingly likely", says Edward Glossop of Capital Economics. Credit default swaps show that the implied probability of a debt default within five years has "soared" to 75%, adds Colby Smith in the Financial Times.

"A 60-year-old lawyer witha long technocratic resum", Fernndez is regarded as more moderate than former president and running mate Cristina Fernndez deKirchner, notes Mellow.Yet academic Robert Scott III says that investors should still be wary of the Peronists."Big spending and truculence with creditors has been ingrained in their DNA Argentina borrowing more from the IMF is like filling a bathtub with a huge drain in it."

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
No deal is the best deal for Britain – and the EU too
Brexit

No deal is the best deal for Britain – and the EU too

Europe has a lot to gain from a thriving, independent Britain, says Matthew Lynn.
6 Sep 2020
Europe’s magic works better in the dark
EU Economy

Europe’s magic works better in the dark

Europe’s latest fiscal intervention looks like the kind of muddle-through that makes a United States of Europe more likely, says Merryn Somerset Webb.…
28 Aug 2020
The eurozone takes a big step forward towards fiscal union
EU Economy

The eurozone takes a big step forward towards fiscal union

The European Union’s coronavirus recovery plan and its decision to issue joint debt will change the bloc forever.
23 Jul 2020

Most Popular

Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
James Ferguson: How bad data is driving fear of a second wave of Covid-19
UK Economy

James Ferguson: How bad data is driving fear of a second wave of Covid-19

Merryn and John talk to MoneyWeek regular James Ferguson about the rise in infections in coronavirus and what the data is really telling us.
17 Sep 2020