MONTHLY INVESTMENT OUTLOOK - by Cédric Ozazman, Nicolas Besson & Marco Bonaviri

The global economic backdrop keeps deteriorating, with China facing headwinds from the trade war and Germany on the edge of a technical recession. Europe’s biggest country endured negative growth in the second quarter on the back of a sharp drop in exports and a lack of investments. For the current quarter, only a modest recovery is expected and Germany may not be immune from a technical recession, should main economic indicators further weaken. To avoid such a poor outcome, the country is reliant on the resilience of the service sector, which is not exhibiting major stress. However, the labour market is losing some steam (see graph below) over the last three months, thus evidencing some contagion from the manufacturing activity to the whole economy. 

To arrest the economic slowdown, Germany can still rely on the ECB, which confirmed its willingness to offer cheap money for companies by cutting interest rates deeper into negative territory and to embark on a new quantitative easing programme. However, this ultra-dovish monetary policy has begun to reach its limit in terms of economic impact, as well as resulting in negative side-effects such as lowering the income for retired individuals. Therefore, the only way to ensure that the economic recovery in Germany would be more sustainable and robust is to adopt a real “Keynesian” economic policy by launching a new government spending programme, coupled with fiscal stimulus. Would the country abandon its so-called “schwarze Null” policy to counter the economic deceleration? The answer is probably yes, but we are sceptical that they will use such economic tools in the coming weeks, as they would prefer to wait for the worst to materialize…

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