Germany is at risk of entering a technical recession after GDP shrank 0.1% in the second quarter of 2019. Pessimism is lingering that there will be another quarter of declining GDP growth when it is reported on 14th November.
Commenting on the events, Daniel Casali, Chief Investment Strategist at Smith & Williamson Investment Management, noted:
“If German real GDP contracts in the third quarter, many will point the finger at trade and the auto industry for being responsible. There has been a spate of weak data reported by German factories recently. In August, manufacturing production fell 4.1% from a year earlier and forward-looking manufacturing orders were down 6.6%, suggesting factory output could potentially fall further from here. Looking a little deeper at the data, the downturn seen in new car production (a key industry in the manufacturing sector) appears to have troughed in July and has steadily picked-up over the last few months. The data indicates that auto output recovered in the third quarter and the sector may not necessarily be the root cause of slowing economic growth.”
“The recent increase in the crude oil price is more likely to be the main factor in the downturn. Germany has the second highest volume of road traffic per unit of GDP in the world, behind the U.S, and has high energy needs to serve that volume of transport. There is little domestic crude oil production so the nation is highly dependent on energy imports. As the value of oil imports increase, Germany’s trade surplus narrows and detracts from GDP growth. This probably explains the fairly tight relationship between GDP growth and changes in the crude oil prices.”
“The good news is that the major impact of the crude oil price is short term. As the Brent crude oil prices has stabilised below $60 a barrel, down from a peak of $74 a barrel half a year ago, the drag on German real GDP from energy prices should ease going forward. Look for the German economy to stage a recovery over the coming quarters.”
Sources: Bundesbank industrial production data, Refinitiv (Thomson Reuters), BCA and Smith & Williamson Investment Management LLP (data correct as of 24th October)
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Investment does involve risk. The value of investments and the income from them can go down as well as up. The investor may not receive back, in total, the original amount invested. Past performance is not a guide to future performance. Rates of tax are those prevailing at the time and are subject to change without notice. Clients should always seek appropriate advice from their financial adviser before committing funds for investment. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.
Notes to editors
Smith & Williamson is a leading financial and professional services firm providing a comprehensive range of investment management, tax, financial advisory and accountancy services to private clients and their business interests. The firm’s c1,800 people operate from a network of 11 offices: London, Belfast, Birmingham, Bristol, Dublin (City and Sandyford), Glasgow, Guildford, Jersey, Salisbury and Southampton. Smith & Williamson is part of The Tilney Smith & Williamson Group.
Smith & Williamson Investment Management LLP
Authorised and regulated by the Financial Conduct Authority.
Registered in England No. OC 369632. FRN: 580531
Smith & Williamson Investment Management LLP is part of the Tilney Smith & Williamson group.
© Tilney Smith & Williamson Limited 2021
Smith & Williamson LLP
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.
Smith & Williamson LLP is a member of Nexia International, a leading, global network of independent accounting and consulting firms. Please see https://nexia.com/member-firm-disclaimer/ for further details.
Smith & Williamson LLP is part of the Tilney Smith & Williamson group.
Registered in England No. OC 369631.
Smith & Williamson Financial Services Limited is authorised and regulated by the Financial Conduct Authority.
The Financial Conduct Authority does not regulate all of the products and services referred to in this document, including Tax, Assurance and Business Services.”