Germany’s economy shrinks unexpectedly
Newsflash: Germany’s economy is back on the brink of recession.
Germany’s GDP shrank by 0.1% in the second quarter of this year, new data from statistics body Destatis shows.
That’s a blow to Berlin’s government, which has been hit by an ailing train network, the surge in energy prices after Russia’s invasion of Ukraine, protests by farmers, weaker demand from China, and a rise in support for far-right politicians.
Economists had expected growth of 0.1% in the quarter.
The decline in activity was due to a fall in manufacturing and construction investments.
Destatis reports that “investments in equipment and buildings, adjusted for price, seasonal and calendar effects, in particular decreased” in the last quarter.
The drop in GDP in the last quarter follows 0.2% growth in the first quarter of 2024.
A technical recession is defined as two quartery contractions in a row.
This takes the shine off a decent start to today’s eurozone growth data, with both Spain (+0.8%) and France (+0.3%) beating expectations…..
Key events
JP Morgan remains bullish on UK stocks
JP Morgan is still bullish on the outlook for the UK stock market.
In a new research note, its analysts say the backdrop for UK equities is “looking favourable”. They cite attractive valuations, improved political clarity and potentially lower bond yields, which all make dividend yields more attractive again.
JP Morgan is maintain its recommendation to remain ‘overweight’ on UK stocks.
They explain:
The elections event risk is behind us, and the new government is likely to provide more fiscal credibility and stability, with focus on domestic agenda, homebuilding and the consumer. Broadly, the beneficiaries stand to be Banks, Homebuilders, Real Estate and Utilities, while on the negative side we have Diversified Financials, E&P and Transportation.
Within the UK, we have a preference for Domestic over Exporters plays, as GBP is firmer, for UK consumer plays, and for Real Estate and Homebuilders – these typically start performing once the rate cuts begin.
In the car world, Tesla is updating the software on more than 1.8 million vehicles in the US to fix a problem that stops unlatched bonnets being detected.
Tesla has started rolling out an over-the-air software update to detect the open bonnet and send a notification to customers, the National Highway Traffic Safety Administration (NHTSA) said today.
If a bonnet, or hood, was not locked properly, it could fully open while a car is being operated, blocking the driver’s view.
The pound is holding firm on the foreign exchanges this morning, unchanged at $1.286 against the US dollar.
But, sterling could weaken on Thursday if the Bank of England decides to cut interest rates from their current 16-year high.
Matthew Ryan, head of market strategy at global financial services firm Ebury, says:
“The Bank of England’s August policy announcement appears on a knife-edge, and one of the tougher rate decisions to predict for some time. We expect the MPC to deliver a 25 basis point cut on Thursday, albeit the vote on rates appears almost too close to call, and could be evenly split between the hawks and doves.
On balance, we think that we’ve seen enough progress on inflation for those members that were close to voting for a cut in June to shift their allegiance in favour of the doves. There is, however, a high degree of uncertainty surrounding this view, particularly given the lack of communications from MPC members since the June meeting, in part due to the blackout period surrounding the general election.
Currently, the money markets indicate there’s a 59% chance of a rate cut on Thursday.
Ryan adds:
As this is not yet fully priced in, an immediate rate reduction would likely trigger some downside in the pound, albeit an upbeat set of communications, particularly a sizable upward revision to the GDP forecasts, could limit the extent of any sell-off.”
In the UK, the Bank of England has created a new cost benefit analysis panel to provide advice when new rules are proposed for firms and financial market infrastructures.
It is chaired by Laurel Powers–Freeling, who is also the chair of Uber UK.
Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, said:
“Cost benefit analysis is an essential part of policy development, and I’m delighted that we’ve been able to attract such a strong panel to help ensure that we do the best job we can in this vital area.”
S&P cuts Bangladesh’s credit rating as curfew and protests hit economy
Away from Europe, credit rating agency S&P has downgraded Bangladesh’s credit ratings to B+ from BB-, nearly two weeks after the government imposed a curfew to quell deadly student protests.
S&P cited a sustained decline in Bangladesh’s foreign exchange reserves, which it says shows there is persistent pressure on the country’s external metrics.
Earlier this month, the Bangladeshi government declared a national curfew and announced plans to deploy the army to tackle the country’s worst unrest in a decade, with AFP reporting that at least 105 people have died in the unrest.
The protests began this month on university campuses as students demanded an end to a quota system that reserves 30% of government jobs for family members of veterans who fought in Bangladesh’s war of independence in 1971.
Those protesting have argued that the policy is unfair and discriminatory as young people struggle for jobs during an economic downturn and instead benefits members of the ruling Awami League party, which is led by the Hasina.
The drop in German GDP in the last quarter is a worry, says Joshua Mahony, chief market analyst at Scope Markets:
The trajectory of the German economy remains a concern for Europe, with the manufacturing powerhouse seeing second quarter growth fall back into negative territory (-0.1%).
Fortunately, things are more stable for the eurozone as a whole, with the latest GDP figure beating expectations to post a second consecutive 0.3% reading in Q2.
CEBR: Eurozone has turned a corner
Pushpin Singh, senior economist at the CEBR think tank, predicts the eurozone’s growth prospects will improve this year:
“Flash estimates from Eurostat indicate that the Eurozone economy grew by 0.3% on the quarter in Q2. This rate was above consensus expectations and matched the corresponding growth rate seen in Q1. The stronger-than-expected growth rate suggests the bloc has turned a corner since the start of the year.
Prospects are likely to improve further throughout the year, driven by recent policy loosening by the European Central Bank and expectations for further interest rate cuts down the line. Cebr expects the Eurozone economy to expand by 0.8% in 2024, up from 2023’s growth figure of 0.4%.”
The eurozone only grew half as quickly as the US in the last quarter.
GDP data last week showed that the US economy grew at a 2.8% annualised rate in the second quarter of 2024, or the equivalent of 0.7% quarterly growth.
Today’s eurozone growth report is “moderate but decent”, says Frederik Engholm, head of Macro & Strategy at Nykredit.
Another moderate but decent GDP print from the eurozone. +0,3% in Q2 (as in Q1). Most notable>> German weakness intact (-0,1%). Germany has stagnated since the covid-crisis, while other major EZ-countries have seen solid growth.
Weak enough for ECB to cut! #dkøko #dkfinans #ECB pic.twitter.com/SULYCvG4gE— Frederik Engholm (@FrederikEngholm) July 30, 2024
Eurozone grew by 0.3% last quarter
Just in: The eurozone grew by 0.3% in the second quarter of this year, a little faster than expected, despite the economic problems in Germany.
Statistics body Eurostat has just reported that GDP increased by 0.3% in both the euro area and the EU in the April-June quarter, which matches the growth recorded in the first quarter of this year.
Economists had expected growth to slow to 0.2% in Q2, so this is a little better than expected.
Ireland (+1.2%) recorded the highest increase compared to the previous quarter, followed by Lithuania (+0.9%) and Spain (+0.8%), while France grew by 0.3% and Italy and Belgium both expanded by 0.2%.
The highest declines were recorded in Latvia (-1.1%), Sweden (-0.8%) and Hungary (-0.2%), while Germany’s 0.1% fall in GDP also dragged on growth.
Another small positive surprise:
Eurozone GDP q/q +0.3% (est +0.2%, last +0.3%)
Eurozone GDP y/y +0.6% (est +0.5%, last +0.5% from +0.4%) https://t.co/IO4H1aRC34— Mario Cavaggioni (@CavaggioniMario) July 30, 2024
