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Iceberg ahead? Bundesbank says Germany is headed to recession

The Bundesbank says Germany is headed to recession. Not good news, especially with the possibility of a hard Brexit on the horizon:

The German economy could slip into a technical recession in the third quarter after failing to recover over the summer, the Bundesbank said on Monday.

In a monthly report, the Bundesbank said falling industrial production and orders would likely lead to a continued shrinkage in the period from July to September, after Germany saw a drop of 0.1% from April to June.

This would mean the economy would fulfill the definition of a technical recession, which is two consecutive quarters of negative growth.

As factors in the slump, the Bundesbank named the trade conflict between the US and China and Brexit, among others.

The problem for Ireland, here, is that the European Central Bank is likely to pursue an economic policy designed, once again, to ease the German pain.

Germany is in negative growth, and in a negative growth cycle, the basic economics handbook says that what you do is keep interest rates low. This encourages borrowing, and penalises saving, and pushes more money into the economy as people start to spend borrowed cash.

The problem is that Ireland is at the very opposite end of the economic cycle to Germany. Just yesterday, IBEC released it’s quarterly economic outlook, forecasting economic growth of 4% in 2019, and almost 3% in 2020. The Irish economy is racing away ahead of the German one, and yet, the European Central Bank will have all its eyes, and levers, directed at Berlin.

If this all sounds familiar, it’s because it’s essentially the same problem the Irish economy had, vis a vis the European economy, in the early 2000s. A sluggish European economy, and very low interest rates, were matched up with a fast-growing Irish economy. The result, of course, was that German banks, encouraged to lend by the low ECB interest rates, could not find willing customers in Germany, and lent huge sums of money to Ireland instead.

And we all know how that turned out.

It’s pretty much forbidden in Ireland to question the wisdom of joining the Euro, so we won’t do that here, but it is worth noting that there was widespread agreement in the aftermath of the 2008 crisis that structural problems in the Eurozone, at the very least, made it worse.

As a result, we had the EU’s fiscal treaty in 2012, and, at this stage, a decade of austerity inflicted on Greece, and slightly less of it inflicted on Ireland. The purpose of all that financial discipline was, remember, to ensure that there could not again be a Euro crisis that would result from an imbalance between European economies.

The basic problem for Germany today, argues Zerohedge, is that the aftermath of the 2008 crisis has left its factories struggling to find customers for its goods:

The popular image of the German industrial machine politics is one which has Germany’s massive factories efficiently churning out goods for trade with the South of Europe (Club Med). Because of the common currency, numerous disparities starting with productivity differences had left the South highly indebted to the North just as the Global Financial Crisis would strike.

The aftermath of that crisis, particularly the second eruption in 2011, posed an economic challenge. Lack of recovery throughout Europe would mean Germany would have to seek its fortunes elsewhere around the world to find new customers in lieu of its old ones being somewhat questionable as to payment.

I raise that point, of course, because it is pertinent in the context of Brexit particularly. The German manufacturing sector is already starving of customers because of lingering economic weakness in Italy, Spain, Greece, and elsewhere. It is now about to lose easy access to the valuable British market, at the same time that Ireland does.

Ireland is exposed to twin risks here – an economy already out of step with Europe, and vulnerable to the sharp shock of a hard Brexit. And at the same time, a German economy that might be about to tip over the edge into a full blown structural crisis around manufacturing, at a time when the rest of Europe desperately needs German economic firepower.

Not good. Not good at all.

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