Tomorrow is a very big day for the euro according to the economic calendar. There’s plenty of data on tap that could potentially move the currency.
Arguably the most important figure is the German quarterly GDP. This is because it is the lead for the eurozone’s quarterly GDP published a little later.
The former takes precedence since, by the time we get the figure for the whole area, all the major constituent economies have reported. So by that point, it’s pretty clear what the number will be.
There are a lot of expectations surrounding the Germans this time around. Last quarter, Germany just managed to avoid a technical recession. Now’s the moment of truth to see if it’s time for a rebound into recovery, or further sliding into an increasingly pessimistic outlook for Europe.
What We Are Looking Out For
Germany’s GDP number is the first in the series of important data releases for the euro. And it will be coming out just as most European traders are getting to their desks: 08:00 CET (or 02:00 EST).
This release typically injects quite a bit of volatility into euro pairs. However, the euro could either exaggerate or retrace in the subsequent hours as we get French CPI, eurozone employment and finally, the eurozone GDP.
The consensus among analysts is that Germany’s GDP will have grown by 0.2% in the first three months of the year. This would be a slight improvement over the 0.0% reported in the prior quarter.
On an annualized basis, this would mean that that the GDP grew by a paltry 1.0%. That being said, that would still be better than the 0.9% annualized as of the prior quarter. Analysts usually consider growth below 2.0% as below replacement level.
The Trends and Issues
The last time German quarterly GDP growth dipped into the negative was in 2014. But, back then, it pulled back to recover quickly within six months.
Growth would have to exceed 0.5% to repeat that prior pattern, something that even the most optimistic analysts aren’t expecting.
The underlying issue is that Germany is a highly export-driven economy. 47% of its economy goes overseas. So, the slowing outlook for the entire world thanks to trade concerns, is having an oversized impact on the largest eurozone country. Outside the EU, China is Germany’s largest trade partner and it’s currently slowing.
The One-Two Punch
The drop in orders from China was precipitous following the imposition of tariffs by the Trump administration. Given the escalating tensions in that affair, this situation appears to be on the verge of getting worse.
Although, we must note that in the first three months of 2019, there was a lot of positivity about a potential trade deal. Therefore, this could have helped fuel confidence in Germany and consequently improved the GDP number we’re expecting tomorrow.
In parallel, Germany has been forced to cut production in order to meet EU regulations. This is particularly true in regards to the mainstay of their economy: cars. The Trump administration has also threatened to put tariffs on cars, which of course, is not helping either.
It’s All of Europe
Traditionally Germany is the motor of the European economy. And the German government has steadfastly maintained a budget surplus.
Leaders of the Union are pleading for Germany to go against its essence and begin deficit stimulus spending. Meanwhile, France is suffering from a slowing economy attributed to the yellow vest protests, and Italy is flirting with another technical recession.
This is in the context of the ECB taking on a tighter stance, even as the low cost of liquidity is helping fuel capital flight from European equities to emerging markets in a desperate search for yields. Unless there is a major surprise in the upside, German GDP numbers are likely to just reinforce a bleak long-term outlook for the euro.