German GDP Preview: Expecting a recovery, like EUR/USD, at least for now

Germany barely escaped a recession in the second half of 2018, but the current year has probably kicked off with an impressive recovery. That is what early indicators suggest, and EUR/USD will likely recover with the continent's leading economy.

The "locomotive" of the euro-zone nearly derailed last year. A series of one-off factors such as a harsh winter, the retooling of automobile factories due to new emission standards, strikes, and other factors turned into a not-so-temporary sluggishness, especially as Chinese demand dropped. The economy contracted by 0.2% in the third quarter and remained flat in the fourth. 

The German government was forced to slash its growth forecasts for 2019 from 1.8% to 1% and then to a meager 0.5%. However, China seems to be behind the potential comeback. The FXStreet calendar shows that expectations stand on a more healthy 0.4 quarterly growth at the wake of 2019. 

The credit boom from the Asian giant is not the only factor behind the more upbeat forecasts. Retail sales have been on the rise, showing that the German consumer has finally woke up. Robust domestic demand undoubtedly helps. 

The expected recovery in the largest economy goes hand in hand with the broader trend in the 19-country bloc. The initial release of euro-zone GDP showed an expansion of 0.4%. The euro-zone figure will be updated after the German release. 

How will EUR/USD react?

If Germany announces a 0.4% growth rate as expected, EUR/USD has room to recover gradually, extending the current cautious trend. Such a figure will be comforting but is unlikely to trigger a euro rally.

A beat, worth 0.5% or even 0.6%, could already spark a more substantial uptrend. It would not only exceed economists' expectations but would also show that Germany is leading the continent in growth.

If Germany lags behind with a growth rate of only 0.2% or 0.3%, remaining the laggard as it was in late 2018, EUR/USD has room to retreat. However, the slide will likely be limited, at least in the short term. The current trend favors the euro as the US dollar suffers from low yields that are a result of the trade war with China.

What's next for the German economy?

Uncertainty is higher than usual due to the trade war just mentioned. The US is currently battling China but also has its eyes on Europe, with plans to impose new tariffs, especially on the automotive industry. And Germany is the most vulnerable country to such measures.

In addition, the continent's largest economy heavily depends on Chinese demand that could dwindle down if US tariffs are painful. Adding political uncertainty ahead of the European Parliament elections, it is hard to see assess if the potential first quarter recovery is a one-off like the third-quarter contraction or the beginning of German leadership. 

Conclusion 

Germany is expected to recover alongside the other euro-zone economies and the recovery trend in EUR/USD. A small miss will probably be shrugged off in the short term. However, the growing uncertainty about Germany's economy could weigh on the common currency later on.