It’s a relatively quiet day on the data front for the euro tomorrow, But, there is one event that could cause some volatility.
Generally, there isn’t much reaction to final GDP numbers because they confirm what the market already knows from the preliminary figure. However, sometimes there are surprises when the final GDP number does come out. And that can significantly move the market!
There is a case to be made that we could have even more movement should Q2’s final GDP be different from what’s expected, because in August liquidity is tighter. Many major traders take their holidays around this time. Therefore, this period often sees more erratic trading. So, what are the chances we could get a surprise, and what could happen?
The expectations are, of course, for the final results to confirm the preliminary ones. We are currently expecting quarterly GDP growth of -0.1% and an annualized adjusted growth of 0.4%.
A deviation of a decimal or two from that wouldn’t change the outlook all that much. So, we’re looking for a revision beyond that range to significantly move the market.
Of symbolic importance is if the quarterly figure is revised up to 0.0%. That would put Germany technically out of risk of a recession for another three months. Just last year, Germany managed to avoid a technical recession when Q4 came in flat after a negative quarter.
This could buoy the bond markets, and by extension, the currency. However, it would likely make the DAX suffer a bit since that would relieve some pressure on the ECB to take a more accommodative stance.
Revisions to prior GDP figures are not uncommon. About 30% of preliminaries are revised for the final. It’s not any more evident from the data that a revision is more likely this time around. An improvement will likely have a stronger effect on the market than a cut. This is because generally, the market is pricing in a poor performance from the euro area’s largest economy.
There are already enough reasons for the ECB to ease policy in some way and put pressure on the German government to provide stimulus. A few decimals lower in the GDP number doesn’t change that scenario as much as avoiding negative growth.
The attention is now moving to the Third Quarter which is over halfway through, now. The Bundesbank recently announced that they expect further weakness in the economy for the rest of the year. They blame Brexit uncertainty and the trade war for lower exports, particularly of automobiles. The latter is what’s dragging on the Germany economy in particular.
This begs the question of how stimulus spending in Germany is supposed to help reverse the external problems that are affecting the economy. Nevertheless, an announcement in that regard from the German government (currently they have allowed for a $50B contingency only in the case of a recession) would likely support equity markets. However, it wouldn’t be all that helpful for the euro.
Analysts are expecting the EC to cut their projections for overall annual economic growth in Germany from their current 0.5% growth. Less optimistic is Deutsche Bank, who are forecasting a -0.3% drop in GDP for Q3. This would imply Germany would fall back into a technical recession.
But the leadership in Germany might have other problems before then. There are strong expectations that if the upcoming elections in Saxony and Brandenburg lead to disappointing results once again for the governing coalition, the junior member (the SPD) will pull their support. This, in turn, would bring about an end to Merkel’s tenure.
All-in-all, further poor performance from Germany just isn’t going to be surprising.