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Weekly Review: Recession hits Germany, but it’s not all bad

Ben Weiss, Friday, 15 May 2020

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It’s official! Germany is down. Europe’s largest economy, known for its strength and efficiency, is the latest to fall victim to COVID-19. It records a second consecutive quarter of negative growth and slumps to a recession. And yet, things are still actually looking very promising for Germany.

Reason for optimism

After last week’s Bank of England announcement, it seems certain that the UK will be plunged into a predictable recession as soon as we get Q2 data out. But Germany, Europe’s largest economy, has beat the UK to it. After adjusted growth in Q4 of 2019 down to -0.1%, it reported this week that its economy had contracted by a further 2.2% in the first three months of 2020.

Recessions usually either have dire consequences, or are a consequence of dire situations. Either way, it’s bad news. But there’s a lot of cause for optimism for this German recession, despite the bleak global economic outlook.

Firstly, other European countries such as Italy and France have recorded significantly greater contractions in their economies; 4.7% and 5.8% respectively. By comparison, 2.2% and a clear path back to recovery is far less concerning. Furthermore, most economies around the world are suffering at the moment, it’s not just Germany. So, the speed at which countries can return to normality could play a strong role in which economies prosper for the duration of 2020.

Germany is already reopening shops, never actually closed certain factories and manufacturing lines and even has the Bundesliga, the country’s top football league, resuming this weekend. It’s clear that the country has handled the pandemic far better than a lot of its counterparts and recession or not, this could prove to be telling in the near future.

But in a perverse way, the pandemic hit at the right time for Germany. Its economy was struggling before this crisis hit, suffering from being closely tied in with the US-China trade war due to significant ties with the former. From Germany’s point of view, COVID-19 evened out the playing field and ensured economies worldwide were badly hit as well. But it did more than that. It damaged economies and set them back months, maybe years as a rebuilding process is now required. But the structure and stability of the German economy means it has the foundations already laid and is in prime position to recover quickly from this ordeal.

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Like all indices, the DAX suffered huge losses but this latest recession set back has not sparked action into the market. It was already priced in, but seeing businesses begin to prosper again in the near future might infuse fresh optimism and confidence into investors. The DAX is certainly one to watch as Germany ‘reopens.’

UK Gambling companies past the worst of it?

With sport all-but suspended across the board, betting companies such as William Hill and GVC Holdings have been in absolute crisis. Their two main forms of income, in-shop gaming machines and online sports betting had been rendered void, meaning most had to hold their collective breath, grit their teeth and simply wait out the pandemic.

But it seems hope might be on the way that they're over the worst of it, and are capitalising on small opportunities where they can.

The Belarussian Premier League has gained a lot of attention recently. It’s the only remaining active football league in Europe, which has led to many gamblers wagering on the relatively unknown entity. Table tennis is another sport that has kept going, and both companies and punters have been left to try to utilise this as an option to generate revenue. But this won’t be the case for much longer.

As we’ve mentioned, German football is back this weekend, and that's set a precedent for other nations to lay plans for their domestic leagues to return. The likes of France and Belgium have cancelled their seasons outright, but as governments across Europe begin releasing plans to get their countries out of lockdown and back to normality, football and sport in general is being put back on the table. England and Spain have been given the green light for their leagues to resume in June.

It's not just football though. Horse racing is making its way back on the sporting calendar, as meetings behind closed doors are being announced. It all bodes very well for these sport-deprived gambling companies, who have been forced to get creative and promote alternative forms of gambling to try to salvage revenue in the form of mediums such as virtual sports betting and poker. Bulls might take note of these firms as sport worldwide begins to resume.

Bitcoin Halving

In crypto news, the world’s most notorious digital currency Bitcoin has been in focus. A Bitcoin halving took place this week, in other words, the reward of mining Bitcoin halved from 12.5 to 6.25btc. So now, those mining farms that are set up to complete transactions in the blockchain network and earn the subsequent Bitcoin reward are going to have to work twice as hard to get the same output as before.

This is hugely significant, as it makes it more difficult to collect unmined Bitcoin and effectively reduces supply. If supply of a commodity (albeit in this case it’s digital and technically a currency) falls, the price typically rises as those wanting that asset are willing to pay more for the scarcer resource.

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Based on the precedent of the past two Bitcoin halvings, we knew it was likely moves north would occur, but it has not quite materialised as expected. Its price (USD) touched 10k briefly last Friday before closing slightly below. On the day of the halving on Monday, it then opened over 13% down. Bitcoin has since returned to the 9.5k level. However, perhaps the pandemic has dampened a sharp spike in its price - as we have seen in the past around the halvings. Throughout the pandemic, the crypto has not been the safe haven asset people expected it to be, with a lot of cautiousness keeping it below $10,000. Furthermore, trading volumes are up significantly in comparison to the two halvings before. Therefore, the market is less prone to sharp moves.

Graph3 15-05-Weekly Review

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