It was bad economic news before coronavirus fears took center stage this month. Europe’s fourth quarter 2019 growth rate of 0.1 percent has crushed hopes that some analysts held for an economic rebound.
The rate was the slowest since early 2013.
The sag deepened with retail sales falling 1.6 percent in December, the sector’s weakest performance in ten years.
The job market, however, ticked up by 0.3 percent, perhaps reflecting holiday seasonal hiring.
Germany’s economy showed no growth during 2019’s final quarter, in part because 7 percent of Germany’s exports are sold to China, which has shut stores and factories during the coronavirus epidemic. The exports accounted for 2.8 percent of Germany’s entire GDP in 2018.
Deutsche Bank estimates the viral epidemic will take 0.2 percent from Germany’s first quarter growth this year, sending the country into a “technical recession.”
A key measure of the sentiment for Germany’s economic outlook fell from a cautious 26.7 in December to a seriously worried 8.7 in January, helping to drive the euro to its weakest measure against the dollar since April 2017.
The euro fell an additional 0.4 percent against the dollar on 18 February, leaving it at just under $1.08.
The yield on Germany’s ten-year bond edged up from -0.436 percent to -0.408 on 17 February.
As the euro fell further, the Stoxx Europe 600 stock index rose 4.8 percent this month and the S&P 500 is up 4.5 percent since January.
The Stoxx index is trading in record high territory, and the interest rate on Greek bonds fell to 1 percent, its lowest ever.
Markets are buoyed by the continued belief that central banks will keep interest rates at rock bottom or in negative territory.
The European Central Bank will meet on 12 March to review its forecast for growth and inflation.
Some analysts think the ECB might cut rates from -0.5 percent to -0.6 percent, but most are confident the bank will hold rates steady.
Goldman Sachs predicts another rate cut is unlikely but added, “We do not discount the possibility that the bank would respond with monetary easing should the coronavirus affect business sentiment and financial conditions.”
TREND FORECAST: The growing distance between stock prices and the economic reality of the falling euro is a measure of investors’ faith that central banks will be able to keep maneuvering economies safely through hard times. With ECB rates at -0.5 percent, however, the central bank is reaching the end of its ability to keep economic reality at bay.
Neither lowering of interest rates, quantitative easing, or calls for fiscal stimulus will generate significant economic growth in a moderate slowdown and will totally fail to reverse the dire implications of the oncoming “Greatest Depression.”
