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Germany Enters Recession, Who’s Next?

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This morning, Germany published the final version of its Q1 GDP figures, showing negative growth. Added to the negative result in the final quarter of last year, that means Germany technically has been in a recession. The market, on the other hand, had a somewhat muted reaction. With the largest economy in Europe turning negative, it opens the question for who’s next.

What happened

When Germany reported the preliminary GDP figure, there was a bit of a surprise and relief as it came in at flat. Most analysts had been expecting a negative result, which would imply a technical recession, because of the issues surrounding the price of energy and uncertainty through the winter. Now that the final revision is out, Germany grew in Q1 at -0.3%, a slight improvement over the -0.5% in Q4, and in line with the initial estimates by economists.

The three decimal point difference isn’t all that major and was expected originally. That could be the explanation for the market generally not reacting much to the data. Specifically on the currency front, it’s not expected to affect the trajectory of the ECB. The shared central bank is expected to hike at the next meeting, and a technical recession in Germany is not seen derailing that.

Across the pond

What has more of an impact on the EURUSD is the other side of the equation: The dollar. Yesterday, Fitch ratings issued a warning over the risk of pending default, saying the uncertainty of the debt ceiling negotiations put the currency on a negative watch. Yields in short-term US debt keeps rising, and investors are looking for safe havens, which means the dollar has been gaining.

The Fed most recently admitted the US could fall into a recession later this year. The Atlanta Fed’s GDPNow economic growth tracker/predictor for the moment says that it expects Q2 US GDP to show growth of 2.1% on an annualized rate. That would be slightly slower than the prior quarter, but still quite a bit far away from a recession.

Other key players

Just a couple of days ago, the IMF revised its outlook for the UK economy, seeing it staying in growth for the rest of the year. This is an improvement from the previous report which had expected the UK to be the only major economy to experience a recession this year. The IMF has not had time yet to update its report after the latest data from Germany.

The depreciation of the Chinese yuan is of note, as it was recently allowed to cross above the 7.0 line against the dollar. Raw material prices have been sinking due to lack of demand from large manufacturing hubs, such as Germany, the US and China. US manufacturing has been in constant decline since the start of the year. While China is growing, it is not as much as expected from the post-covid lockdown. The urgency with which Chinese officials continue to ease monetary policy to support the economy also suggests that the economy isn’t flourishing.

Under those circumstances, commodity currencies are under pressure with demand for safe havens such as the dollar, despite the debt ceiling debacle.

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