special reports

German Economy to Shrink in the Third Quarter, Confirm Recession (Euro Open)

Thursday, 13 November 2008 05:09:01 GMT  |  Ilya Spivak, Currency Analyst

Germany’s Gross Domestic Product headlines the economic calendar in European hours, with expectations calling for the second consecutive quarter of negative growth to confirm the Euro Zone’s largest economy is in recession. Overnight trading saw New Zealand’s Retail Sales fell for the third consecutive quarter, while Japan’s wholesale inflation was down a massive 2% in October.

Key Overnight Developments

• New Zealand Retail Sales Fall for Third Straight Quarter
• Japanese Wholesale Inflation Down 2% in October


Critical Levels



The Euro kept to a 60-pip range in overnight trading, oscillating below the 1.25 level. The British Pound followed suit, trading sideways around the 1.49 mark.


Asia Session Highlights



New Zealand’s Retail Sales shrank for the third consecutive quarter in the three months through September, falling an inflationary-adjusted -0.9%. Falling house prices, rising unemployment, and tight credit conditions have severely dented consumer sentiment. The markets are pricing in a whopping 100 basis point rate cut in December as the Reserve Bank of New Zealand scrambles to reboot sagging economic growth. Rates have already come down 1.75% since July. New Zealand is formally in recession having seen Gross Domestic Product shrink in the first and second quarters of this year.

Japan’s wholesale inflation fell to a 5-month low in October as the Domestic Corporate Goods Price Index fell grew at an annualized 4.8%, down two full percentage points from the preceding month and lower than the 5.5% expected outcome. Wholesale inflation has slowed dramatically since peaking in August along with oil and other key commodities. While easing price pressure would typically allow the central bank some room to lower borrowing costs, the scope for further monetary stimulus is limited for the Bank of Japan with rates already at a meager 0.30%. On balance, the road to recovery lies in the export sector for the world’s second largest economy, intimately tying its fate to that of its top trading partners in the US and China.


Euro Session: What to Expect



Preliminary estimates of Germany’s Gross Domestic Product are expected to show the economy shrank -0.2% in the three months through September, the second consecutive month of negative growth. This means the Euro Zone’s largest economy is now formally in recession. Annualized growth is set to slow to 1.6%, the most sluggish in over 2 years. The European Central Bank is expected to offer more monetary easing to bolster the ailing economies of the 15-nation bloc, with the markets pricing in 100 basis points in rate cuts over the next 12 months. A fiscal stimulus package is also likely to emerge after next week’s G-20 summit in Washington, DC. A preliminary meeting of G-20 finance ministers in San Paolo, Brazil over the weekend urged countries to use “all their policy flexibility, [including] monetary and fiscal policy.”

France’s Current Account is expected to show a deficit of -3.8 billion euro in September, down from the -4.2 billion shortfall in the preceding month. Last week, we saw the trade portion of the metric post a record -6.25 billion deficit, wider than -5.37 in the preceding month, as slowing global demand stifled export growth. The capital side of the equation is unlikely to have been supportive, with France’s CAC 40 benchmark index down -9.5% in September and the Euro sank -11.8%. The 10-year government bond rose a meager 0.3%, unlikely to be enough to offset net capital outflows and opening the door to a downside surprise for today’s release. Meanwhile, October’s Consumer Price Index is expected to see annualized inflation down to 2.6%, the lowest in almost a year. The result helps to give the ECB more room for monetary easing, though the likelihood of continued cuts is hardly news-worthy with central banks around the world racing to out-do each other in slashing rates. The markets are pricing in a -0.50% cut from Trichet and company in December, with 106 basis points in easing over the next 12 months.

Switzerland’s Producer and Import Prices are expected to sink to 2.9% in the year to October, the lowest in over 12 months. Although the markets continue to price in no changes in benchmark lending rate, the SNB cleared showed that they are not above participating in coordinated policy action (of the kind likely after next week’s G-20 summit): Jean-Pierre Roth joined colleagues at the ECB and BOE to for unified European rate cut last week.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at fxcm dot com.

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