Graph showing the price of the DAX on 14.02.2019. Source: TraderPro.
The DAX is struggling following the German economy narrowly avoiding a recession. Germany’s economy recorded growth of just 0.02% in the final quarter of 2018, meaning it narrowly avoided entering into a recession off the back of poor Q3 figures. Europe’s largest economy saw a 0.2% contraction over the three-month period between July and September.
What is a recession?
An economy is technically in recession if it sees two consecutive periods of negative growth. This should not be confused with an economy’s growth slowing; for instance, an economy going from 5% growth (Q1) to 2% growth (Q2) to 0.01% growth (Q3) would not technically be in recession – although it would be heavily implied. However, were it to go from -10% growth (Q1) to -5% growth (Q2) to -0.01% growth (Q3), an economy would be in recession despite contractions easing.
Why is the German economy struggling?
As one of the largest economies in the world, the German economy is very much integrated with other major economic powers. Therefore, the global economic slowdown, that have not been helped by the US-China trade war and Brexit affecting the European single market, would have had an impact on Germany. As a chief exporter, Germany is susceptible to external economic implications.
Another main factor said to have attributed towards this near-recession is the contraction of the German car sector. Consumers remain hesitant to spend, perhaps down to new emissions rulings that have recently been introduced by the government. It limited the amount of nitrogen oxide a car can legally produce, and many of the new diesel vehicles don’t abide by these standards and are still exceeding limits.
What are the implications to the rest of Europe and the world?
As one of the world’s economic heavyweights, ripples of Germany’s downturn will undoubtedly be felt by many. If we look at the global economy as a whole, Germany is one massive pillar, along with the likes of the US, China and Japan, holding it all up. China and the US aren’t currently providing maximum support, so were one of the other economic superpowers to suddenly experience a severe decline, the global implications could be big.
In terms of Europe, Germany is the main driving force behind the single market. The slowdown is not colossal at this stage, but sustained periods of weak growth or even negative growth could take its toll on other European countries.
How is the DAX reacting?
At around 08:00 on Thursday (14th) when this news first broke, the Dax sat at 11270.2 after experiencing a sharp rise earlier that morning from around the 11200.0 mark – perhaps in anticipation of positive growth figures. A little over an hour later, it had fallen to 11180.8.
After much fluctuation for the rest of the day, the DAX looked to have settled at around the 11190.0 mark, however at the time of writing, it’s just taken a sharp fall to the 11150.0 mark. The index may continue to be volatile for the near future.
All eyes will be on the first quarter economic report, published in a few months’ time, as another quarter of negative or very low growth could symbolise more of a long-term problem. The trade war and Brexit negotiations are likely to continue to be significant to Germany’s economy and a possible revival.