Europe’s largest economy has been in recession for 6 months and no one noticed
Anyone looking for evidence that financial markets do not necessarily reflect the real economy need look no further than Germany. Less than a week after the country’s blue-chip index hit a new closing record, federal statistics reported Thursday that Europe’s biggest economy is mired in recession. Downward revisions to previous estimates now reveal that total output contracted in two consecutive quarters, by 0.5% at the end of last year and 0.3% at the beginning of this year, meeting the criteria for a technical recession. .
Initially, official estimates suggested a fall of 0.2% and stagnation, respectively.
So what is going on here?
The root cause of the country’s woes is reduced consumer spending during the winter, exacerbated by higher energy costs from the abrupt shift away from cheap Russian oil and gas.
Household consumers generally must save a much larger portion of their income due to a comparatively low rate of home ownership and a lack of a pervasive culture of equity.
However, the 1.2% drop in the first quarter turned out to be worse than expected, as annualized inflation rates of more than 9% ate into their disposable income.
The arrival of warmer temperatures and lower heating bills points to some short-term relief, but a combination of factors suggests that Europe’s once dynamic economic engine will finally stall as higher interest rates cool. activity in capital-intensive industries such as manufacturing and construction.
The Düsseldorf Institute for Macroeconomic Policy predicts only “tepid growth” in the coming summer months: “Unlike other expansion phases, the recovery in China is not supported by solid investments from which the German export economy can benefit “.
The recovery is already underway
The chief economist at Hamburg Commercial Bank, which co-publishes a purchasing managers’ index for Germany with S&P Global, believes the recession is now over thanks to a service-led recovery.
“There are still signs of pent-up demand here after Corona, whether it’s for travel or eating in a restaurant,” said Cyrus de la Rubia. Fortune.
Furthermore, the financial sector is unwilling to strangle the supply of credit to the real economy, as is widely feared in the United States after the collapse of three major regional banks.
“Credit conditions are certainly tightening, but not excessively in a historical context, and certainly not to the extent that one should fear a credit crunch,” de la Rubia said.
However, higher borrowing costs and weak export prospects for China mean it expects only tepid 0.2% growth for the full year.
The fact that Germany’s 40 leading companies that make up the DAX closed at a new record on Friday amid such challenging economic conditions is partly due to one important aspect that sets them apart, de la Rubia explained.
“It’s the so-called ‘performance index’ based on total shareholder returns.
That means that the automatic reinvestment of dividends is incorporated into its calculation,” he said. “If you look at the ‘price index’ adjusted for this effect which is comparable to the S&P 500, you’ll see that it’s still notably below its all-time high.”