German GDP Preview: Outright contraction could send the Euro even lower, regardless of expectations


  • Germany is expected to report an outright contraction in Q3. 
  • If realized, the news could weigh on the Euro regardless of the low expectations.
  • A recession in Germany seems unlikely, but a negative quarter means it cannot be ruled out.

Germany, the largest economy in the euro-zone, publishes its preliminary Gross Domestic Product report for Q3 on Wednesday, November 14th, at 7:00 GMT. 

The de-facto leader of the European Union is not only the most-populated country in the bloc, not only has the largest economy but usually leads also in growth: the economy expands the gap with its peers, notably France. 

But this time may be different. Consecutive disappointments in industrial output, unimpressive consumption, sliding purchasing managers' indices, and even a squeeze in the trade balance surplus resulted in very low expectations.

The economic calendar shows a consensus of -0.1% QoQ - a slide in the size of the economy, or contraction. The preliminary growth rate in the euro-zone for the same quarter stands at 0.2%. an update for the euro area's GDP growth will be released at 10:00 GMT.

Back in Q2, Germany enjoyed a healthy expansion of 0.5% QoQ, above the currency bloc's growth rate of 0.4%. All in all, Germany is expected to drag the euro-zone down, lag rather than lead.

Year over year, growth is projected to decelerate to 1.2% against 2.3% in Q2, nearly half.

EUR/USD reaction - as expected is not good enough

The Euro is already suffering from the ongoing Italian crisis. The third-largest economy remained stagnant in Q3, but Italy's shadow on the common currency originates from the clash between Italy and the European Commission over Italy's budget breach. The US Dollar enjoys the Fed's hawkish message.

So, the world's most popular currency pair is already in a vulnerable position. Also, if the German economy squeezes, it is bad news regardless of expectations. Contagion is more significant when it comes from the top. 

Therefore, even an "as expected" outcome of -0.1% could send EUR/USD down.

What happens if the economy "only" stagnates? On the one hand, it is better than expected. On the other hand, Germany does not lead the euro-zone forward. 

Therefore, a positive growth rate will be needed to support the common currency amid the Italian crisis and the dollar's strength.

And the economy squeezes more than expected, EUR/USD could come under immense pressure.

Recession?

The standard definition of a recession is two consecutive quarters of negative growth. If Q3 GDP growth is an outright contraction, it will take Q4 to repeat the outcome for headlines to scream that Germany is in recession.

Most economists in the central European country do not expect that outcome. The current state of the Euro helps German exports. 

However, fear after an adverse outcome could become a self-fulfilling prophecy that could manifest itself. To a recession. 

There is also a contagion effect: if the German economy squeezes, other countries could suffer. If they haven't suffered in Q3 like Italy, they could fall in Q4.

All in all, even if Germany the locomotive only reverses on the tracks for one quarter, the train could still derail. 

Conclusion

The German economy probably shrank in Q3. The publication of a contraction or even a stagnation could weigh heavily on the euro. A surprise with positive growth may be needed to stabilize EUR/USD amid unfavorable market conditions for the pair.

More: EUR/USD Forecast: 3 reasons for breaking the double-bottom, now challenging downtrend support

 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Analysis


Latest Forex Analysis

Editors’ Picks

AUD/USD jumps back above 0.6950 as S&P 500 futures test 3,200

Following a bearish opening gap, AUD/USD has recovered ground and trades above 0.6950, tracking the bounce in the S&P 500 futures. The bulls shrug off US-China tensions and the worsening coronavirus situation in the US and Australia. 

AUD/USD News

USD/JPY bears holding their positions below 107 level

Yen remains a safe haven currency of choice as trade wars and the coronavirus play havoc risk apatite. Investors pin hopes on Gilead Sciences reporting that its antiviral drug Remdesivir recorded positive results in clinical trials.

USD/JPY News

Gold: Pierces $1,800 inside short-term bullish flag

Gold prices extend recoveries from $1,798.14, defies two-day losing streak. A seven-day-old bullish technical pattern, sustained trading beyond immediate support favor the buyers. 200-HMA offers additional downside support, bulls will cheer break of $1,811.60.

Gold News

WTI: Depressed above $40 amid output cut talks

WTI defies the late-Friday recovery moves while slipping from $40.80. Saudi Arabia pushes for two million barrels a day output cut, IEA improves on oil demand forecast. Risk-tone remains mildly positive amid virus woes, US-China tension.

Oil News

S&P 500: Bank's earnings in focus, COVID-19 induced insolvency fears simmer away

The S&P 500 will be a key theme on Q2 earnings this week, traders watching the banks for guidance. Wall Street stocks remain in bullish territory, but the S&P 500 is on thin-ice while below the June highs. 

Read more

Forex Majors

Cryptocurrencies

Signatures