Q4 European GDP & The Euro Reaction

The week is going to close with a bang for euro traders.

There is a host of economic data coming out in the morning that routinely riles up the markets. Key among them is the much anticipated quarterly GDP figures from Germany and then the entire eurozone.

With the ECB more focused on supporting the economy lately, the data could give us some insight into potential policy changes over the rest of the semester.

Recently, EBC head Lagarde expressed some pessimism about the prospects of Europe’s economy. This was followed by poor industrial production data out of Germany.

So will the bad news continue?

What We Are Looking For

Germany reports its GDP before European trading gets underway.

Although we get more data later in the day, the quarterly change in German GDP generally sets the tone for the market’s performance. This is because Germany is the largest country in the eurozone.

The consensus of expectations is that German GDP grew by just 0.1% in the final quarter of the year. This would be the same as the dismal third quarter.

On an annualized basis, that would mean the economy grew by 1.0%. That result would be a bit of an improvement over the 0.2% registered in the prior measurement. It would actually be an improvement over 2019 overall in which Germany registered a technical recession.

So, you could argue that with these figures, Germany will register technical growth.

Three hours later the eurozone reports its GDP figures. Not all that surprisingly, these are very similar to Germany’s.

Quarterly economic growth is projected to be 0.1% compared to 0.1% prior. On an annualized basis, projections indicate that eurozone GDP will have grown 1.0%, the same as the prior measure.

The Situation

Germany has been back in the news lately with some things that are likely to have a drag on the economy.

But, they all happened after the fourth quarter was over. Thus, they won’t be reflected in the data. In other words, these less than positive results are likely to be the high-water mark in the German economy for a while.

The markets don’t like uncertainty. And another round of leadership contests of the leading political party isn’t going to make investors comfortable. Especially when it could include a resignation of the Chancellor, depending on who gets put forward!

The Fundamentals

The other factor is that supply disruptions from the coronavirus are likely to have affected German manufacturers (as well as other parts of Europe).

Some analysts put the effect between 0.3-0.6% in GDP, which would imply that Q1 growth will be negative this year. That’s the first step for Germany falling again into a technical recession.

On the other hand, corporate earnings out of Europe have so far performed better than expected, if only because expectations have been low. Stock indices have managed to push higher ahead of the largest components of the DAX and Stoxx600 reporting through the week, while the euro suffered.