Morning Commentary: Europe’s Potentially Most Dangerous Country

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Europe’s Potentially Most Dangerous Country Share this story: Alan Rose Foreign Exchange Senior Trader

It seems like we have been writing, talking, and reading endlessly about Brexit and the ramifications for the U.K., EZ economies, and the rest of the world. While there is no doubt that Brexit is a very important issue, a case can be made that the most dangerous country in Europe regarding its impact on the world economy is actually Germany, not the U.K.   Germany, the largest economy in Europe, is also the driving and political force of Europe.  Over the decades, the German economy has become increasingly dependent upon exports as a larger share of its GDP. In the 1970s, 80s, and 90s, German exports as a percentage of GDP averaged between 15-20%. Starting around 2000, that percentage has risen sharply to nearly 47% in the past seven years. This becomes problematic because an economy as large as Germany's is no longer really in control of its economy and is too dependent upon other countries demand for German growth.   China and Europe’s economies have both slowed sharply in the second half of 2018 negatively impacting demand for German exports. Germany barely escaped a recession in the second half of 2018 as Q4 growth was flat after declining in Q3. It is great for Germany when all the world economies are in-sync and growing as a rising tide lifts all boats, but when the tides recedes, countries are exposed to their inherent weaknesses.   The importance of the German economy to Europe cannot be overstated. If the economic data continues to falter, and in particular the industrial production and manufacturing data, weak German growth will continue to hit business and consumer confidence. This could set off a chain reaction that will not only impact the German economy but all those other European economies that are dependent upon German growth and pull them all down. A weaker European economy will also have ripple effects and negatively impact the U.S. economy. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: U.S. economic data was disappointing this morning. The Empire Manufacturing index for March came in well below expectations at 3.7 and Industrial Production for February rose only by 0.1% against expectations of a gain of 0.4%. U.S. interest rates are lower on the session, but the U.S. dollar (DXY) is only fractionally lower.

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