Brexit vote, recession in Germany?

What does Brexit Plan B look like?

The vote in the British Parliament on the divorce package with the EU, originally scheduled for December 11, will take place on Tuesday next week. The starting position is clear. Nobody expects the package to get a majority, so all attention will be focused on the British government's Plan B. The government has three days to present this, according to a parliamentary decision this week. The next deadline is therefore January 21.

The market reaction will probably depend on the extent of the expected defeat. A narrow defeat could raise hopes of getting a majority in further votes, while a clear rebuff would probably put new elections on the agenda, which could take place within 25 days at the earliest. Should the defeat take place to the expected extent, the attention of the markets will shift relatively quickly to January 21. The market reaction will then depend on what Plan B looks like. Since we rule out the possibility of renegotiation with the EU, we see only two realistic alternatives, namely a hard Brexit or new referendum. The latter is clearly more likely, and the EU should also be prepared to postpone the withdrawal date. A referendum could no longer be held before March 29. The prospect of a new referendum would probably be well received by the markets, as there would at least be a chance that the UK would remain in the EU. If, on the other hand, the British government does not provide a credible alternative to the divorce package by January 21 and loses more time, the markets would increasingly prepare for a hard Brexit. This means uncertainty in a number of areas. First, contingency plans would be used to avoid the worst effects of an abrupt break. While both the EU and UK have readied such plans, it can only be discovered after March 29 whether everything has been considered. The second uncertainty relates to the impact on the economy. Uncertainty would probably be drawn into the real economy and thus lead to temporary negative impact. All in all, this would trigger a prolonged period of low yields on government bonds and would probably weigh on the euro exchange rate against the dollar.

Is Germany threatened by a recession?

Due to the importance of foreign trade, Germany's economy is particularly susceptible to the current phase of global trade weakness. Already in 3Q18, Germany's GDP shrank by 0.2% q/q, triggered by falling exports and shrinking private consumption. In addition, negative one-off effects (new registration procedures weighed on car production and low water levels dampened transport capacity in inland navigation) weighed on growth. As things stand at present, however, the passenger car sector does not seem to have completely overcome the problems with the new registration procedures. If Germany's GDP fell further in 4Q18, Germany would technically be in recession. Therefore, next week (January 15), the focus will be on the publication of a first estimate of GDP growth for 2018 as a whole.

Leading indicators developed in a mixed manner in 4Q18. For example, based on the average data for October and November, Germany's industrial production shrank by 1.7% compared with the average for the third quarter. On the other hand, retail sales (October/November), supported by a sharp fall in energy prices from November onwards, increased by an average of 0.6% compared to 3Q. Against this backdrop, we expect Germany's GDP to have grown slightly in 4Q, although a further decline (should the problems in the automotive sector persist unchanged, for example) cannot be entirely ruled out. We assume that growth in Germany and the Eurozone will weaken in 2019 in the direction of potential growth (approx. 1.5%), due to a lack of impetus from foreign trade.

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