Global economic health check: Germany scrapes by while UK struggles

There is a lot resting on the middle of the month economic data for the major developed markets this week. Political issues and even trade wars have taken a back seat as traders sink their teeth into the latest updates about how the major economies are managing as we move towards the end of the year. 

Germany swerves a recession

So far, the news is mixed. Germany’s Q3 GDP beat analyst estimates and rose by 0.1%, shrugging off fears of a recession for the EU’s largest economy. This is hardly a speedy growth rate, but the fact that Germany did avoid a recession is symbolically important and is the main reason why the euro is higher again today. EUR/USD has just broken back above the $1.10 level, and we believe that today’s better than expected news from Germany could trigger a prolonged rally in the euro for the next few days, which may drag this pair back to the early November highs above $1.1180. That is a fair way off for now, the first key resistance level is $1.1040, and then $1.11, which is a level that has thwarted the euro since November 5th. Overall, we believe that talk of Germany’s economic malaise was premature at best, we would argue that Germany is experiencing a two-speed economy, with the service sector growing at a decent pace, while manufacturing is suffering, partly because of global factors. 

Why Germany means that ECB’s QE programme’s days are numbered 

If you look closely at the German GDP report, growth was led by the higher spending from households, exports rose while imports were flat, the labour market remains solid, however industrial data remains mired in negative territory. However, there are glimmers of hope that this could be changing, after new manufacturing orders rose by 1.3% for September.  The strength of the German consumer could be one reason why the German government has held off from adding fiscal stimulus to the economy and has remained critical of the ECB’s recent monetary largesse. German growth is still slow by historical standards, the economy expanded by 0.5% annually in the third quarter. As long as the US/ China trade war does not deteriorate further, then we could see a period of recovery for the German manufacturing sector and GDP pick up in the coming quarters. 

The euro view 

For the euro, the fact that other Eurozone nations are growing at a decent clip should take the pressure off the ECB to act further in 2020. We believe that the latest version of ECB QE will have a fairly short shelf life, and the new President, Christine Lagarde, may preside over the winding back in of September’s stimulus programme as we move into the second half of 2020. This is all positive for the euro and over the next few days we expect the upward momentum to continue.

UK’s sluggish economic problem 

The story for the UK is rather different. GDP was weaker than expected, inflation sunk last month, and retail sales declined by 0.1%, increasing fears that Europe is now the sick man of Europe. GBP/USD has declined slightly this week, but overall it remains stable. As we have discussed previously, the fact that the Conservatives have a healthy lead in the polls is pound positive for now. Rather than lead to a spike higher in GBP, it is cushioning the blow of a week of bad economic data. Thus, unless we see a big upturn in support for the Brexit party in the coming months, which is the real threat to the Conservative party in our view, then we believe that downside for GBP is limited to $1.2825 in the short term, and we could end the year above $1.30, if the economic data picks up for November/ December.

US stocks hits a record, again 

Elsewhere, we have mentioned that the outlook remains bright for US and global stocks, even though US corporate earnings for Q3 remain in negative territory. The S&P 500 struck a new record high on Wednesday, which was unsurprising to us. Even a heightening of rhetoric in the US/China trade war is not a serious concern right now, while it may weigh on the S&P 500 in the short term, we believe that any decline will act as another buying opportunity. 

The biggest US corporate news on Thursday is that Walt Disney has attracted 10 million subscribers to its streaming TV service on the first day of applications. That is an astonishing figure and suggests that Netflix had better watch out. Unsurprisingly, Disney shares were up some 7% in after-hours trading on the news. This could also be a sign that the US consumer remains strong. US retail sales are released on Friday, the market is looking for a 0.3% increase after a flat reading for September. Stronger than expected retail sales data could trigger another push into record territory for the US index at the end of this week.