Final German GDP: How Fast Will the EU Economy Recover?

Tomorrow we get the final report on Germany’s GDP numbers.

Expectations are for these numbers to confirm the preliminary numbers showing that Germany’s GDP contracted in the first quarter by 1.7%. This is in comparison to a growth of just 0.5% in the final quarter of last year. That means Germany would most likely avoid falling into a technical recession.

Although the talk of recovery is dominant, there is also a question of what the economy is returning to. The thing is, technically avoiding a recession has become something routine for Germany.

Prior to the pandemic, the largest economy in Europe oscillated between meager growth and minor contraction and essentially remained stagnant.

A recovery to stagnation?

Germany’s economy is about 6% smaller than it was at the start of the pandemic. That would put it at about the size it was in mid-2016.

Following the 2011 euro crisis, Germany had healthy economic growth until the end of 2018. It then basically tracked sideways until the pandemic.

Right now, many analysts are looking optimistically towards recovery. That said, during the distraction of covid, Germany has not made significant strides in terms of economic structural reforms to push the economy beyond mere recovery.

It’s true that CEO optimism is the highest it’s been in decades. On the other hand, Germany just suffered an economic and diplomatic blow with the EU not ratifying the investment and trade agreement with China, the final policy push by outgoing Chancellor Merkel.

Where are we going?

A consensus is still forming for the second quarter. Analysts are generally expecting a reversion in the data.

An average of the available projections shows an expectation that Germany’s Q2 GDP will show a growth rate of 1.7%. This would put the county in line with the Bundesbank’s projection of a return to pre-pandemic levels by the end of the year.

On the more worrisome side, the same Bundesbank projections show that inflation will likely peak at 4% this year. Meanwhile, economists expect the ECB to keep policy the same.

So, the end result of two years of dealing with the pandemic might be that the German economy is right where it started four years ago. Although, the German people now have significantly less purchasing power. Not to mention the government is in debt for the first time in decades, needing to draw down spending to return to their fiscal rule.

What does it mean for the markets?

Because of the slower vaccine rollout, Germany is expected to be in catch-up mode with other major economies for the rest of the year. This might offer potential investment opportunities, and support the stock market.

With other economies relying more on deficit spending to get them through covid, the projection of 4% inflation in the eurozone might be comparatively modest, which could support the euro.

However, that means that once normalization has completed, Germany will have increased export costs. This will provide a headwind for what so far has been propping up their economy: exports outside the eurozone.

Optimism about the recovery might be a strong driving force for the next few months. But traders ought to be aware of what could happen to the markets when investors realize what returning to normal for Germany really means.

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