Markets Cycles Part 1: The Looming Fears of a European Recession
The cyclical nature of booms and recessions through regional and global economies is a hot topic of conversation when making future predictions. The last couple years have seen economic growth, low interest rates, easy access to capital, business-friendly policy and financial market growth. The topic on every asset manager‘s mind is “when will the music stop?” - managing director Rothschild London. The ongoing debate is widely acknowledged as not being a question of if, as much as it is a question of when. Varying perspectives range from ‘right around the corner’ to ‘there are several golden years ahead’.
The German industrial complex has been fundamental to the wellbeing of not just the German economy, but the Eurozone economy as a whole. Recent indicators have led to concerns for investors about the prospects of Eurozone economy. One such example has been the 1% decrease in industrial (factory) orders for ‘made in Germany’ products, when the predicted decrease by economists was only around 0.4%. Total German industrial activity has fallen by 1.9% between the period of November and October across all sectors from consumer goods to energy. The third quarter of 2018 saw German GDP fall, meaning that a fall in the fourth quarter would place the country in a technical recession; two consecutive quarters of negative GDP growth. The preliminary figures regarding quarter four of 2018 will be released on February 11th, 2019 and are expected to have an immediate and drastic effect on the performance of European stocks. “During the third quarter of 2018 the GDP was down and — related to the strong decrease in the German production this winter — GDP may again shift downward in the last quarter”, said Philippe Waechter, chief economist at Ostrum Asset Management.
The German economy makes up 21% of the European Union (in 2016), followed second by France at 15%. A German recession will most definitely mean a European one, especially as fellow nations have performed either similarly or worse. Major German companies have European exposure, and the aforementioned concerns have manifested themselves in very poor performing stock prices. The relationship between major companies and economies makes it difficult to separate cause and effect; they both determine the state of an economy and are affected by it. Alongside overall industrial slowdown, the performance of some of Germany’s biggest players should have investors skeptical at best and placing short positions at worst. Airbus reported the cancellation of orders worth $4 billion, dominated by eight A380 aircraft. Experts predict that the company will be hit with issues ranging from Brexit, to trade tensions, and now a European Industrial slowdown, expecting its share price to decline in the short-term. Deutsche Bank, Germany’s biggest financial institution, has been struggling notoriously with its internal affairs issues, constantly performing maintenance work on its company image and its stock price. As the unofficial financial ambassador for Germany, it suffered significantly under the looming economic threats. Between the 7th and 8th of February, its share price plummeted approximately 10%, whilst Germany’s second biggest bank, Commerzbank, fell by 7% in the same period. Overall, the DAX (a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange), fell in this period by an approximate 3.3%.The continuation or turnaround of this downwards trend will largely depend on the data to be released on Monday.
Editing by Tom Handels