Technical Recession: What it is and How the Trumpian Era Driving The Economy to a Potential Recession.

 The term “technical recession” has been all over the past month, as many analysts see the risk of a technical recession in the Eurozone’s largest economy piling up.
Andria Pichidi

The manufacturing sector in particular is the one that has turned into a drag on overall growth as it has felt the fallout from geopolitical trade tensions and is likely to come under further pressures for the rest of the year. Germany will increasingly be in the firing line especially if growth doesn’t improve soon.

Another painful call for caution was given today with the manufacturing PMIs for the Eurozone highlighting the sector’s contraction in Germany, the UK, and Italy as well. The German outcome was revised lower at 43.5, while the UK’s August Manufacturing PMI was seen at the lowest level of the past 7 years. Remarkably, the releases show that countries like France, who focused on domestic demand rather than foreign, have been less affected in a period of a high downside growth risk globally.

Meanwhile, German car producers are still suffering from the fallout from the diesel scandal but will also be in the firing line for another round of US tariffs on imports from the EU, which seem increasingly likely considering that there is little to no progress in trade talks.

The sector is also feeling the pressure from a no-deal Brexit scenario. Indeed, given the fact that Boris Johnson has been given moral backing by US President Trump, he could well back this up with tariff threats in September, which would strengthen the UK’s hand in the last weeks for possible talks ahead of the October 31 Brexit date. In that scenario and with signs that Germany’s weakness is spilling over to the rest of the Eurozone, pressure on Berlin to ditch the focus on budget consolidation is rising.

But let’s see what technical recession actually means and why it is important.

Recession, simply put, is the decline in economic activity, usually visible by a significant drop in five of the most important economic indicators, i.e. real gross domestic product (GDP), income, employment, manufacturing, and retail sales. Technical recession though refers to the sequential decline in GDP for the past two quarters. This presents economic contraction since the GDP measures the value of all goods and services produced in a country during a specific period of time, in other words, the total expenditure in the economy.

The potential of a technical recession is visible in the Eurozone and Asia:

PMI manufacturing data out of both Europe and Asia have painted a worrisome picture, overall, today, showing the direct and indirect impact of the Trumpian era of trade warring. This comes with additional US tariffs being implemented on Chinese goods, as well as retaliatory levies from China. China’s official August manufacturing index dipped to 49.5 below the 50 expansion/contraction line, despite the improved CAIXIN PMI to 50.4 from 49.9.

In the rest of Asia, export-oriented South Korea, Japan, and Taiwan also showed their respective manufacturing sectors to be in contraction, shining a light on the indirect effect of geopolitical tensions.

Meanwhile, in the Eurozone, German GDP contracted -0.1%, which added to expectations for ECB stimulus. Overall, it was largely as expected number for Q2 GDP, with the main weakness in exports and an unexpected contraction in investments. The scaling back of investment and the weaker than expected consumption profile tie in with the ongoing deterioration in business confidence and signal a more lasting slowdown, with the risk of a technical recession. The composite PMI fell back to 50.9 in the final July reading, the lowest since 2013 and effectively signaling stagnation in overall economic output. ZEW and Ifo surveys also continue to decline.

Moreover, the drop in German Q2 GDP was a reminder that the fallout from geopolitical trade tensions and Brexit uncertainty is threatening to derail the global economy.

What could happen this week?

Another confirmation of downside risk to the growth outlook could be seen this week, as Eurozone Q2 GDP growth will be announced on Friday. It is anticipated that the report will emphasize the two most export-oriented economies, i.e. Germany and Italy.

Looking ahead, the weakness is likely to persist in the third quarter, as confidence data remains depressed, and the weakness in manufacturing is starting to impact the labor market. Meanwhile, a potential announcement of additional tariffs on imports from the EU by the US will increase the pressure on the European economy, as the US remains the largest destination of EU exports. In 2018 EU exports to the US reached EUR 407 bln, with imports from the US coming to just EUR 268 bln.

Theoretically, however, if the economy shows positive growth for the remaining two quarters of this year, Germany will avert a recession for the calendar year 2019.

How could a recession affect us?

In general a recession, technical or not, has an immediate impact on the labor market, consumer behavior and the interest rates of a country as well.

  • In the labor market, unemployment rates run extremely high due to the decline in investment into the country. As the unemployment rate rises, consumer purchases fall off even more.
  • As the recession affects interest rates, spiking good and services prices, consumers often cut spending on non-essential items and prefer to spend money on necessities only, due to their insufficient income.
  • Production slows down, thus giving rise to prices.
  • Businesses start consolidating their expenses, and that suggests job cuts.
  • Manufacturing, construction, wholesale and retail trade, as well as accommodation are at a higher risk of being affected.

Hence as we have stated the direct and indirect impacts of the recession, the question is how long it will take until the weakness in German manufacturing spreads, especially as the improvement in the labor market is already starting to wane. The same question stands for the Asia region as well.

Stay tuned to the HotForex Analysis page for exclusive expert analysis and education!

For now, optimism that the situation will change is based on Central banks. In China, the State Council’s financial stability and development committee announced that it will keep a prudent monetary policy, with “reasonably ample” liquidity and “reasonable growth” in aggregate financing. In Europe, the ECB is holding on track with another comprehensive easing package and a further cut in rates.

Andria Pichidi, Market Analyst at HotForex

(Read Our HotForex Review)


Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US