German Economy Loses Momentum but Avoids Recession

Euro Zone government bond yields are edging lower while the Euro is off its high against the U.S. Dollar on Friday after the release of German economic data failed to trigger any major response by traders.

The German economy likely stagnated in the final quarter of last year and grew by 1.9% over the full year 2022, the Federal Statistics Office said on Friday, suggesting Europe’s largest economy may escape a recession over the winter.

The full-year rise in gross domestic product (GDP) just beat the mid-range forecast of 1.8% in a Reuters poll of economists. GDP in 2022 was 0.7% higher than in 2019, the year before the start of the COVID-19 pandemic.

Reaction to German Report Mostly Positive

“The economic slowdown over the winter half-year will, according to the data we have now, be milder and shorter than expected,” Economy Minister Robert Habeck said in the ministry’s monthly report.

Thomas Gitzel, chief economist at VP Bank, said the economy had outperformed low expectations, adding:  “It is possible that the recession will be postponed. On the other hand, we think it is unlikely that the recession will not materialize at all.”

German Data Driving Some Movement in Local Yields

Germany’s 10-year yield was down 3 basis points (bps) to 2.10% aft. On Thursday, it spend most of the session at its lowest levels in four weeks before hitting a day’s low at 2.06%

Some Debate Over Direction of Interest Rates

Traders are saying a bleak economic outlook in the Euro Zone might slow down monetary tightening, even though European Central Bank officials had reiterated they would raise interest rates to fight inflation even in a recession

Both sides of the issue are tugging on each other with some investors betting that weak economic data and peaking inflation can force a major policy change.

Greek central bank chief Yannis Stournaras said on Thursday the ECB would continue raising interest rates until there is certainty that inflation was de-escalating towards the 2% target over the medium term.

Forwards on the ECB Euro Short-Term Rate (ESTR) peaked in August 2023 at 3.3%, while pricing in a policy rate at 3.2% in December 2023 and at 2.8% in May 2024, according to Reuters.

Additionally, ECB policy maker Martins Kazaks is pushing back on investor bets that the ECB will cut interest rates by the end of this year, saying it would take a deep recession for borrowing costs to be lowered.