US Stock Market
‘Perfect Storm’ Economy for German Recession
The Euro Crisis has only just begun
Overseas financial markets are surging. European stock markets have plummeted for 5 consecutive days, and the German DAX has retreated 5%.
The stock market is bad, but the more thrilling is the exchange rate market. Yesterday, EUR/USD fell below 1:1 parity in mid-July. The current price is 0.99208, hitting a new 20-year low, with a cumulative depreciation of about 20% from the beginning of last year. Among them, the last 8 trading days plunged 3.9%, the decline is extremely alarming.
The determinant of the euro exchange rate, in addition to monetary policy, is more important than economic performance. The economic heart of the euro zone is undoubtedly Germany, which can basically be considered as follows: Germany thrives, the euro is strong, Germany declines, and the euro is weak.
However, in this crisis, Germany has been hurt the most.
Since 2019, Germany has fallen behind all other G7 economies. After adjusting for inflation, Germany’s GDP shrank by nearly -1% in the first quarter compared to before the pandemic. In the second quarter of this year, Germany's GDP growth rate was 0%, lower than the expected 0.1%, and only 1.5% higher than the same period last year. In the second quarter, the GDP of the euro area grew by 0.7% from the previous quarter and 4% from the same period last year.
Among them, in May this year, Germany's foreign trade was unusually rare for its first trade deficit in 31 years. Foreign trade is very important to Germany, accounting for 47.5% of the economy, and exports to outside the euro area account for about 30%.
It can be seen that the German economy has recovered the slowest after the outbreak, and has now stagnated. In fact, the next three or four quarters are even less optimistic.
In July this year, the German manufacturing PMI was 49.3%, which fell below the 50 line of prosperity and decline and hit a new low since June 2020, far below the 52 in June. In the service sector, the PMI was 49.2 in July, much lower than the 52.4 in June. After the PMI falls into contraction across the board, a recession will be ratified by reality.
Public consumption, which accounts for around 23% of total GDP, is also very important for Germany. However, the consumer confidence index has fallen to -30.6 in July, the lowest record since the reunification of the two Germanys in 1990, and it is even more sluggish and pessimistic than the 2008 financial crisis and the 2020 Covid crisis.
Electricity is the most basic energy for economic production and life, and it is indispensable. But the German side has suffered severe shocks in many ways. In addition to the shock of Russia's gas cut-off, Germany has also experienced severe extreme weather such as severe high temperature, drought, and extreme weather once in a century this year.
On the one hand, this will greatly increase the demand and consumption of electricity. On the other hand, the water level of important transportation channels, such as the Rhine River, has dropped to 34 cm, which is not fully passable, close to the lowest level since 2018. This severely hampered water transport, affecting operations at industrial facilities including Germany's largest oil refinery. And millions of tons of iron ore, coal, chemicals, petroleum products and other goods are transported along the Rhine every year.
All of this will make Germany's inflation situation even more severe. In July this year, the German CPI was as high as 7.5%, slightly lower than the 7.6% in June and still at a historically high level. Among them, the price of energy products increased by 35.5% year-on-year.
In this regard, it is increasingly likely that the German economy will fall into recession, and the inflation rate will continue to rise, and may reach more than 10% this autumn. Germany, which has the strongest economy in Europe, can't stand it anymore.
Louis Yap
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