DUBAI: Europe has been through recessions two recessions in the recent past and if the financial oracles are to be believed, the continent is headed in the same direction again.
The data coming out of Europe’s largest economy have not made for pleasant reading recently. Germany reported last week that its industrial production fell by 4 per cent in August from the month before, the biggest decline since early 2009. Earlier this week, factory orders fell by their largest amount in five years as well, with orders from outside the Eurozone falling by nearly 10 per cent.
Following a 0.2 per cent per cent drop in GDP in the second quarter, the signs now suggest that Germany’s manufacturing-heavy economy could have slipped back into recession, as defined by two consecutive quarters of falling economic output.
Germany’s export-led economy is suffering from the weakness of its neighbours in the Eurozone, who continue to reign in spending in the aftermath of the euro debt crisis. And the Chinese economy is also slowing, hurting German equipment exports.
On top of that there are the tit-for-tat sanctions between the European Union and Russia, which recently prompted the IMF to lower its growth forecasts for Germany for this year and next.
In its World Economic Outlook, the IMF urged that countries with healthy public finances, such as Germany, should spend more on infrastructure in order to boost growth and cautioned against over-aggressive attempts to reduce budget deficits.
Add it all up and it’s easy to see why the European Central Bank felt the need to launch a new round of stimulus measures. German opposition to those measures is more difficult to figure. Despite its recent stumble, Germany is better off than most of the Eurozone.
When the centre is stumbling, the fate of periphery should be less surprising. Greece, which everyone thought was on the mend, saw its bond yield cross an important line. “If you cast your mind back 3 years you may remember that in the heat of the sovereign debt crisis, when Europe’s struggling periphery saw their bond yields cross above 7 per cent, it was considered the point of no return. Well, last week, Greek 10-year yields did just that, they crossed this important line, and have continued to push higher on Wednesday,” Kathleen Brooks, Research Director UK EMEA and FOREX.com.
Greek yield spreads (with Germany) rose sharply last week, Portuguese yields have turned higher, and the Spanish spread has also started to widen. At this stage, the contagion effects are minimal, as Spanish and Portuguese yield spreads with Germany are still at relatively low levels. However, Greek, Spanish and Portuguese yield spreads have tended to move in the same direction for most of the last 5 years, although Greek yields have tended to overshoot more.
Europe’s growth forecast was revised down by the IMF for this year and next year, disinflation has taken a firm hold and even Germany is showing signs of stress.
“Rising bond yields are merely a reflection of the troubles that have resurfaced in the currency bloc. We tend to think that the economy is the biggest threat, and if growth does not pick up sometime soon then we could see rising bond yields spread beyond Greece into Portugal, Spain and even Italy,” said Brooks.
