Should We Be Worried About The German Economic Slowdown?

Germany's economy is slowing down.

What Happened

In May, German factory orders slumped. Orders for German goods were down by 2.2% on the month after rising slightly in March and April, according to the most data from the Economy Ministry, Reuters reported.

The German economy makes up nearly a third of all economic activity in the eurozone.

European Central Bank President Mario Draghi is stepping down; Christine Lagarde has been nominated to succeed Draghi in the role. 

The next Central Bank president need to convince Germans of the need for a longer period of low-interest rates or increased government spending, according to The Wall Street Journal.

Why It's Important

As an economy heavily dependent on exports — especially exports of capital goods — Germany is vulnerable to a slowdown in capital spending, said Zhiwei Ren, managing director and portfolio manager at Penn Mutual Asset Management.

“The European Central Bank is aware of the economic slowdown in the eurozone and is expected to cut rates in order to support growth,” Ren said. 

"The market is pricing a 10-basis point rate cut by September. However, the rate cut is going to be mostly about confidence rather than real monetary easing. There is no liquidity issue in the eurozone. Currently, 14 high-yield bonds in the eurozone are trading at negative yields." 

The Sino-American Trade War Impact

The U.S. trade war with China has had a ripple effect that is reverberating throughout the global economys. Although the tension between the two countries has calmed, there is still no resolution.

Ren pinpoints this as a factor and said that Germany’s economic state is the result of the U-S.-China slowdown. Germany’s re-acceleration is completely dependent on the U.S. and China’s growth re-acceleration, he said. 

"The trade war between the U.S. and China is a big headwind for Germany’s export-oriented economy."

Brexit Concerns

Adding to Germany’s woes and further uncertainty in Europe: the U.K., which has formally been trying to negotiate a deal to leave the European Union.

So far, U.K. politicians have struggled to agree on a deal and have been plagued by internal politics, with Prime Minister Theresa May resigning and the Tory party being expected to vote in her replacement soon. 

Price Action

The iShares MSCI Germany Index Fund EWG is up 11.15% in 2019.

Related links

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