Germany could face a technical recession in the third quarter as economist predicts the economy to contract 0.2% following a 0.5% decline in the previous quarter. Economic activity in Europe’s largest economy has weakened considerably throughout the second half of the year as service-based activity contracted in October for the first time since January.
Trading the News: German Gross Domestic Product What’s Expected
Time of release: 11/13/2008 07:00 GMT, 02:00 EST
Primary Pair Impact : EURUSD
Expected: -0.2%
Previous: -0.5% Effect the German Gross Domestic Product had over EURUSD for the past 3 months
2Q 2008 German Gross Domestic Product
Economic activity in Germany contracted for the first since in nearly four years due to a severe downturn in private-sector consumption. GDP fell 0.5% in the second quarter, which was slightly stronger than the 0.8% decline projected by economists, but has stoked fears that Europe’s largest economy may slip into a recession by the end of the year. Mounting price pressures have led consumers to cutback on spending and businesses to slash investments, and growth prospects may deteriorate further over the coming months as demand from the global economy falter. Despite the increasing downside risks to growth, higher prices led the European Central Bank to raise the benchmark interest rate by 25bp to 4.25% at the July 3rd meeting, and may continue to hold a hawkish outlook as the inflation rate remain well above the ECB’s 2% target.
1Q 2008 German Gross Domestic Product
The German economy grew at its fastest pace in 12 years during the first quarter due to a surge in capital spending. GDP rose 1.5% from the fourth quarter as businesses increased investments in machinery and construction, which has certainly helped to raise growth prospects for Europe’s largest economy. The resilience in the German economy could lead the European Central Bank to remain focused on inflation, and may opt to hold the benchmark interest rate steady at the six-year high of 4.00% over the near-term. However, increased prices pressures continues to pose a threat to the economy as higher inflation erodes purchasing power for consumers, and demands from the global economy may decline even further over the coming months as the euro appreciates against its currency counterparts.
4Q 2007 German Gross Domestic Product
Germany grew at a slower pace in the fourth quarter as GDP cooled to 0.3% from 0.7% in the previous quarter. Higher food and energy costs is clearly taking a toll on the economy as increased price pressures pushed consumers to cutback on discretionary spending, and conditions may only get worse over the next year as higher inflation continues to sap purchasing power. In addition, slowing demands for the global economy have also stoked concerns that economic activity may weaken further throughout the next year as the euro remains highly appreciated against its major currency counterparts. Higher exchange rates will certainly drag on exports going forward, and the euro may rise higher in the months ahead as the European Central Bank continues to hold a hawkish outlook on inflation.
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How To Trade This Event Risk
Germany could face a technical recession in the third quarter as economist predicts the economy to contract 0.2% following a 0.5% decline in the previous quarter. Economic activity in Europe’s largest economy has weakened considerably throughout the second half of the year as service-based activity contracted in October for the first time since January. In addition, the final services PMI reading was revised lower to 48.3 from a preliminary reading of 49.7 to reach its lowest level since 2003, which suggests that economic activity is slowing at an even faster pace than economists initially expected. Moreover, manufacturing activity contracted for the third consecutive month in October, and conditions may only get worse as fears of a recession intensify. Mounting growth concerns have also led consumers to cutback on discretionary spending as retail sales plunged 2.3% in September, and conditions are expected to only get worse as factory orders plunged 8.0% during the same period. The dour outlook for Germany has certainly raised expectations that the European Central Bank will deliver a 50bp rate cut at the December 4th policy meeting to stave off further downturns in the economy. Meanwhile, ECB council member Guy Quaden stated earlier this week that the central bank is likely to lower their forecasts for growth and inflation, like the Bank of England, as growth prospects deteriorate. The dovish statement by the policymaker indicates that conditions are becoming far worse that the bank had initially expected, and has spurred speculation that the ECB could be forced to lower borrowing costs well into the next year as the major economies throughout Europe slip into a recession. The dour outlook for the economy paired with lower interest rate expectations suggest that investors will remain bearish against the euro over the near-term, and may fall even lower in the next year as the growth outlook turns increasingly bleak.
Despite expectations for a negative GDP reading, trade conditions for Germany improved during the second half of the year as the trade surplus widened 15.0B from 10.6B in August due to an unexpected rise in exports. As a result, an improved growth reading would clearly favor a long euro trade, and we will look for a green, five-minute candle following the release to confirm an entry on two lots of EURUSD. Our initial stop will be placed at the nearby swing low (or reasonable distance), and this risk will determine our target for the first lot. Our second target will be based purely on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.
Conversely, two consecutive quarters of negative growth would label Germany to be in a technical recession, which would only fuel bearish sentiment for the euro. Therefore, a decline in GDP of 0.2% or greater will favor a short EURUSD trade, and we will follow the same setup as the long trade listed above, just in reverse.