Recession fears abound in Europe as uncertainty lingers

September 1, 2019

 

 

It has been over a decade since the Great Recession of 2007-2009. Now more than ever, markets across the world are exhibiting the warning signs of another major downturn. Assigning responsibility at this stage is difficult. But one thing is for certain: uncertainty is in the air. An escalating Sino-American trade war and the ever-nearing deadline for Britain’s exit from the European Union are shaking markets. 

 

The situation in Germany is perhaps the most worrying. Its economy shrank by 0.1 percent during the last fiscal quarter. If this continues until the end of September, it will have entered a technical recession, defined as two consecutives quarters of negative growth. German 30-year bond yields are negative, a signal that investors are worried about a slowdown or contraction. The Bundesbank, Germany’s central bank, said in its monthly report for August that a technical recession is likely, partly thanks to slowing industrial output, which dropped five percent last quarter and continues to fall.

 

The bank also cited uncertainty about trade and Brexit. Two of its largest trading partners are embroiled in a trade war, and both are exhibiting signs of an oncoming slump. Britain, which imported $75 billion worth of goods from Germany in 2016, experienced negative growth in 2019’s second quarter, likely thanks to Brexit uncertainty. Germany’s economy is dependent on exports to these nations and others and a slowdown in international demand in the coming months will not do it any favors.

 

A recession in Germany would be bad news for the rest of the Eurozone. It is an economic powerhouse and the largest economy in Europe. Many other nations in the European Union rely on its exports. France, Belgium, and the Netherlands, among others, all list Germany as their biggest trading partner. And the state of the German economy isn’t the only problem facing the EU. 

 

Italy is in the midst of a political crisis that came to a head when its Prime Minister, Giuseppe Conte, resigned on August 20, in effect leading to a government collapse. Such a crisis threatens investor confidence in Italy’s ability to pay back its staggering public debt, which represents 134 percent of its GDP. The Italian economy is not doing so well either, having experienced no growth at all during the second quarter of this year. In this light, Italy may well default on its debt, which could spell disaster for the EU.

 

Overall, the European economy grew by only 0.2 percent in the second quarter of 2019, falling short of its 0.4 growth in the first quarter. In response to this dim outlook, the bank’s options are limited, as benchmark interest rates remain at zero.

 

Of course, recessions are never guaranteed until they actually occur. Various indicators are useful methods of measuring confidence, and can often signal that a period of growth is nearing its end. But pinning down a specific time and location for when the recession will hit is a near impossible task. For one, economists are notoriously poor in their ability to predict recessions. Though their insights are valuable, their predictions have poor track records. And worried consumers who read headlines forecasting global doom may change their behavior, altering the accuracy of those predictions.  

 

What is clear, however, is that governments should take action to increase certainty, and prepare for a coming decline. The situation may be too far gone now to prevent a global contraction, if not a recession, but perhaps preparation could ease the effects.

 

Image - Unsplash

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