It was a relatively busy start to the day on the European economic calendar. After disappointing manufacturing sector PMI and business sentiment numbers, German GDP and consumer sentiment figures were in focus this morning.
Today’s GDP numbers had to align with the European Commission’s upward revision to euro area growth forecasts for 2023 and the more hawkish ECB monetary policy outlook.
However, the German economy contracted 0.3% in Q1 versus a prelim 0.1% contraction. In Q4, the economy contracted by 0.4%. Year-over-year, the German economy contracted by 0.2% versus prelim figures that showed growth of 0.2%. The economy expanded by 0.3% year-over-year in Q4.
According to Destatis,
- Household final consumption expenditure declined by 1.2%, with inflation weighing on spending.
- Weak spending was evident across several areas, including food & beverages, clothing & footwear, and furnishings.
- Government final consumption expenditure fell by a more marked 4.9%, quarter-on-quarter.
- However, investment increased in Q1, with foreign trade also contributing positively.
While the GDP numbers had more significance, German consumer sentiment also drew interest. The GfK German Consumer Climate rose from -25.7 to -24.2 for June versus a forecasted -24.0.
According to the May survey,
- Income expectations improved for an eighth consecutive month. The indicator increased by 2.5 points to -8.2 points.
- However, the propensity to buy and economic expectations waned in May.
The larger-than-expected contraction in the German economy and consumers less willing to spend will be of concern for the ECB. A weaker propensity to buy indicator followed a marked decline in household spending during Q1.
EUR/USD Reaction to German GDP and Consumer Sentiment
Ahead of the stats, the EUR/USD rose to an early high of $1.07569 before falling to a pre-stat low of $1.07329.
However, in response to the economic indicators, the EUR/USD rose to a post-stat high of $1.07402 before sliding to a low of $1.07282.
This morning, the EUR/USD was down 0.13% to $1.07359.
Next Up
Investors should track ECB member commentary throughout the day. ECB Executive Board member Luis de Guindos is on the calendar to speak today.
Looking ahead to the US session, it is a busier day on the US economic calendar. US jobless claims, second estimate GDP numbers for Q1, and pending home sales figures for April will be in focus.
We expect the jobless claims and GDP numbers to have more impact. An unexpected fall in initial jobless claims and an upward revision to GDP estimates would fuel bets on a June rate hike.
However, the FOMC chatter and US debt ceiling-related news also need consideration.
According to the CME FedWatch Tool, the probability of a 25-basis point Fed interest rate hike in June stood at 36.4%, up from 28.1% on Tuesday. The FOMC meeting minutes did not write off a June interest rate hike, with concerns over inflation raising bets on a June move.
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The German federal statistical office has reported on Wednesday that the German economy, Europe’s largest, contracted in the third quarter of 2019 for the second consecutive quarter. GDP declined 0.1%, mirroring the contraction in the preceding quarter, which followed a relatively stagnant 0.4% growth in the first quarter of this year.
The disappointing data comes at a time of economic uncertainty, with the country’s leading export market, Europe, being at risk of a recession. Weakness in vehicle production, as well as a decrease in investment spending are two of the primary factors that contributed to the most recent contraction.
Industry observers and economists have noted that recent geopolitical events, such as lingering trade disputes with the US, has had an impact on German economic data. Furthermore, Germany’s automotive sector, a key contributor to the country’s growth, is facing a challenging year due to the diesel emissions scandal.
In response to the disappointing economic figures, German Chancellor Angela Merkel has called for more investment in infrastructure and steps to encourage domestic consumption. The government’s new finance minister, Olaf Scholz, has promised to take measures to support businesses and the economy in the coming months.
In the wake of the news, several economists have revised their forecasts for 2019 downwards in light of the news. Many expect a further slowdown, with some predicting a recession should the economic situation remain unchanged.
In order to avoid a recession, the government must take decisive action in order to spur growth and ensure future stability. These efforts must be focused on investing in the future, in order to regain the confidence of investors and the global markets.
