Germany on the Cusp of Recession

Economic Blog
September 26, 2019

The German economy, typically a key growth engine for Europe, is sputtering. In fact, it may be entering a recession as we speak.

As shown in the LPL Chart of the Day, German gross domestic product (GDP) is expected to grow only 0.1% in both the third and fourth quarters, according to Bloomberg consensus forecasts, after contracting modestly in the second quarter. Most economists use two consecutive quarters of declining GDP as the benchmark for measuring recession.

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“What has typically been the engine of growth in Europe has been a drag,” said LPL Chief Investment Strategist John Lynch. “Germany is a good bet to enter a technical recession in 2019, and we may see only minimal growth in 2020. Political uncertainty is rising throughout the European continent and in the United Kingdom at a time when the region faces challenges with deficits and exhausted monetary policies. We think this lackluster growth outlook makes Europe a less attractive place to invest currently.”

Germany’s manufacturing decline also points to possible recession. Markit’s manufacturing Purchasing Managers’ Index (PMI) for Germany fell to 41.1 in September, a level historically consistent with a contracting economy that is contracting. A PMI near 40 historically has reflected too much downward pressure for a broad economy to withstand. The last time Germany’s manufacturing PMI fell this low was June 2009, after four straight quarters of declining GDP.

Optimists will point to a slightly better picture in the rest of Europe, like brighter growth prospects in France and Spain. The economic drag from Germany’s new auto emissions standards may be temporary, providing an opportunity for better growth ahead. However, with German auto tariffs potentially looming next month, Germany’s outlook is still shaky.

Look for more on international economies and markets in our upcoming Weekly Market Commentary. And if you believe lower stock valuations are a reason to buy European equities, we continue to see better value in emerging markets, as we discussed in our blog “Are International Stocks Too Cheap to Ignore?

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This Research material was prepared by LPL Financial, LLC.

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