Usually, the final GDP numbers repeat the preliminary ones, or there is a decimal or two adjustments.
In normal circumstances, a decimal up or down is often just a matter of rounding and doesn’t have significant implications. But Germany – indeed, the entire eurozone – is not in normal circumstances, despite the lack of significant economic growth being the trend for over a decade at this point.
The preliminary results published on February 14th showed that the German economy flatlined for the final quarter of last year.
When sitting on the line between growth and contraction, one decimal can be quite significant. Even if it’s just a technical change!
In 2019, Germany just narrowly avoided falling into a technical recession. Even if the final results come in at zero, we have a significant chance of that happening again this year.
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Potential Moves
But if Q4 German GDP is adjusted down by just one decimal, that would put the country into technical contraction for the third time in two years.
Should Q1 (with the effect of COVID-19, the fallout from Brexit, and trade tensions added on top of it) not improve, it would mean Germany is already in a technical recession. The last time that happened was in 2013, in the aftermath of the Greek debt crisis.
While that’s a relatively small change, and can be attributed to rounding, it’s a bad image. And it can have important psychological implications.
Likely the EUR would suffer against its pairs as investors factor in the potential for more spending and stimulus actions from regulators. It would also increase the pressure on Berlin to increase spending, something that they have resisted so far.
Potential Fiscal Policy Outlook
The next general election in Germany isn’t until late next year. But, with recent resignations in the leading governing coalition party, some analysts are questioning if the “Grand Alliance” between the CDU and SPD will make it to the end of the term.
Merkel’s hand-picked successor as the leader of the CDU, Annegret Kramp-Karrenbauer, lasted a little over a year in the post. She quickly went on to resign over the controversy in a regional election in Thuringia.
The relationship with the SPD suffered further due to the incident. Now, there is uncertainty about who will win the internal elections. Should one of Merkel’s political rivals win, it might bring an end to her Chancellorship. Consequently, it would trigger early elections.
That’s not exactly the kind of uncertainty that will help support investor confidence! Despite the business-friendly CDU still leading the polls, the decidedly business-unfriendly Greens are hod.
Supply Chain
Meanwhile, there is a return of optimism as many analysts believe that the COVID-19 outbreak is being handled. The next problem is the extended closure of factories in China which are only now starting to return to production.
A record number of containers are stuck in Chinese ports, waiting to be sent. With factories in Germany having dwindling inventories, they might be forced to shut down if supplies don’t reach them in time. Otherwise, German businesses will have to find more expensive alternatives.
Given the 30-45 day offset in supplies due to shipping times, over the next couple of weeks, we are entering a critical phase. This will allow us to see just how much of an impact the supply chain disruption could have on industrial production.
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