Cool Story, Hansel

German economic growth

Image source: Photo_SS, Mauro Rodrigues, MPanchenko - Shutterstock

What's going on?

Data out on Wednesday showed the German economy grew 0.4% in the first quarter. That should see off any lingering fears of recession – but a rise in the price of the country’s bonds suggests the German fairytale could yet turn Grimm.

What does this mean?

Europe’s largest economy (and the world’s fourth-biggest) has got back to growing ways, much to investors’ relief. Germany grew 0% in the last quarter of 2018, and shrank the one before that. But so far this year, higher household spending and stronger construction activity has helped deliver at least some growth.

Despite these positive developments, German government bond prices rose on Wednesday (reducing the yield they offer investors) to levels not seen since 2016. Seen as a safe-haven investment due to their reliable payout, the bonds’ yields fell further into negative territory – meaning their owners are willing to accept a sure-fire small loss on their money rather than risk a big one on other investments…

Why should I care?

For markets: One swallow doesn’t make a summer.

Germany’s narrow return to growth is cold comfort for jittery investors spooked by trade wars. While the US has reportedly postponed a decision on taxing imports of European cars, China’s move to impose higher tariffs on $60 billion of US goods doesn’t spell good news for anyone’s economic growth outlook. Downbeat comments from German ministers and weakening business sentiment in the country may also be keeping investors in wait-and-see mode.

The bigger picture: Italy remains a nuisance neighbor.

Italy’s deteriorating public finances are adding to Germany and the European Union’s headaches. The country has the second-highest debt pile in Europe after Greece, and that now looks set to increase further this year – despite previous agreements. Truculent talk from senior Italian government figures this week may have driven investor demand for safe-haven investments like German bonds – regardless of Germany’s Größe domestic product data.

Originally posted as part of the Finimize daily email.

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