Aug 15, 2019

Shrinking German economy signals danger for global financial health

Illustration: Lazaro Gamio/Axios

The Dow's 800-point fall grabbed headlines, but the real warning about the global economy's dire health comes from Europe. The German economy shrank in the second quarter, showing negative growth for the second time in 4 quarters.

Why it matters: Germany is being decimated by the global downturn in manufacturing and trade that has weighed extensively on major exporting countries. The downturn is likely coming for other economies as well, experts say.

  • "Germany is a more export-oriented economy than even China, so in some respects it’s the canary in the coal mine," Milton Ezrati, chief economist at Vested and former economics head at asset manager Lord Abbett, told Axios.
  • "When people say the U.S. economy can’t continue to grow when the world is in recession, what’s happening in Germany is indicative of the fact that the world is in recession," Ezrati said.

The big picture: Germany is the largest economy in Europe and the growth engine of the broader eurozone economy. As such, it was not the only economy to show its suffering Wednesday.

  • The British economy also shrank in the second quarter, as did with Sweden, and the eurozone broadly grew just 0.2%, half its total from the first quarter.
  • China, the world's No. 1 trading nation, also is showing signs of stress. Its industrial output reading for July was the weakest in 17 years, and it reported much weaker-than-expected investment and retail sales numbers.

Be smart: In a global economy, “U.S. economic developments affect the rest of the world, and the reverse is also true,” Fed Chair Jerome Powell said last month.

Yes, but: Seema Shah, chief strategist at Principal Global Investors, predicts the downturn could be delayed until 2021.

  • “The U.S. economy is clearly weakening and risks are piling up. Capex will inevitably slow further, but under the assumption that the trade war doesn’t escalate further, it will not weaken so much as to tip the U.S. into recession," Shah wrote in a note to clients.
  • "The Fed pivot in early 2019, global central bank easing, China stimulus and the reversal of its deleveraging process will support the global economy," Shah said.

Where it stands: The 2 levers that have saved the economy in previous times of crisis look exhausted.

  • Central bankers have clearly gotten the message and are cutting interest rates at a level not seen since the financial crisis. However, studies show monetary policy is not as powerful as it once was.
  • The world is already deeply in debt and democratic institutions are extremely polarized, making government spending more difficult as well.

Go deeper

The synchronized global slump

Photo: Johannes Eisele/AFP/Getty Images

It was 20 months ago that we told you about the highly unusual dynamic of synchronized global growth — the world’s 10 biggest economies growing at once.

The state of play: Now, we seem headed for the Synchronized Slump — and we had the rise of inward-looking, finger-pointing nationalism in relatively good times. Imagine the world as things go south.

Go deeperArrowAug 15, 2019

Fed tweets show Trump doesn't understand central banking

Trump announces Powell as his Federal Reserve nominee in November 2017. Photo: Drew Angerer/Getty Images)

President Trump's latest tweets have continued a pattern of attacking the Federal Reserve and his handpicked chairman Jerome Powell for months using a mix of half-truths, mischaracterizations and hyperbolic fantasies, such as a claim that the stock market would be 10,000 points higher if not for the Fed.

Driving the news: On Wednesday morning, Trump said on Twitter that the Fed "cannot 'mentally' keep up with the competition - other countries. At the G-7 in France, all of the other Leaders were giddy about how low their Interest Costs have gone. Germany is actually “getting paid” to borrow money - ZERO INTEREST PLUS! No Clue Fed!"

Go deeperArrowAug 29, 2019

Trump calls on Fed to cut rates by "at least 100 basis points"

President Trump on Monday tweeted that the Federal Reserve should cut interest rates by "at least 100 basis points, with perhaps some quantitative easing as well," in order to boost the U.S. and world economy.

"Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to 'will' the Economy to be bad for purposes of the 2020 Election. Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world. The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!"
Go deeperArrowAug 19, 2019