Outside the Box

Is Germany Entering a Recession?

August 21, 2012

Even in August, while nearly all of Europe is on vacation, we find that economies don't get to take vacation. Europe will come back from its holiday and find that nothing has improved and some things have gotten worse. Specifically, Germany looks to be rolling over into recession. In this week's Outside the Box, Charles Gave of GaveKal looks at Deutschland and notes that while it might be able to handle a mild recession, problems will be that much worse in the rest of Europe, which needs a robust German consumer. This letter will print long due to a number of charts.

"While Europe's biggest economy should be able to endure this loss of altitude, the reverberation across Europe will be significant. The absence of exchange rate volatility over the last 15 years has allowed economies such as Italy and France to escape depression-type conditions, which might otherwise have occurred given their economic underpinnings.

"Now, however, there can be no escaping the fact that reduced German imports must cause a decline in French and Italian exports. This will likely be a shock for those who expect the German juggernaut to drag the southern economies back to growth. To put it bluntly, Germany will very shortly be subtracting from growth in the rest of Europe."

Charles is one of the founders of GaveKal (along with his son Louis and Anatole Kaletsky). GaveKal is one of the world's leading independent providers of global investment research. It also advises several funds, with combined assets of more than US$1.2 bn. With eight partners and 45 employees, GaveKal has its headquarters in Hong Kong and offices in the US, Europe, and China.

I am back from a needed time off and feel ready to get back into the harness. So, without further ado, let's look at what Charles has to say.

Your wondering how David Copperfield does it analyst,

John Mauldin, Editor
Outside the Box

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Is Germany Entering a Recession?

The western world's post-2007 economic horror show has already been lumped into the simplified moniker "Great Recession". In fact, the last five years have seen a series of distinct economic cycles that started with the precipitous global contraction induced by Lehman Brothers' failure.

Subsequently, a series of "second wave" recessions have hit Europe; these contractions started at the periphery with Greece and Ireland, moved to Portugal,…

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Camp Wynn

Aug. 23, 2012, 11:25 a.m.

This was a great article.  One point that was not discussed was the political aspects of a German recession.  The German populace may no longer be willing to support the rest of Europe if they find themselves in a recession.  If Merkel felt additional pressure from voters to curtail support for the PIIGS in favor of domestic aid, the bailouts could all unravel.

Nick Jacobs

Aug. 23, 2012, 4:30 a.m.

Gave makes a fundamental mistake on his first chart, the rate of change in the IFO index. The chart shows horizontal lines marked “1 std dev”. But the IFO time series - like most financial and economic time series - is heteroskedastic. Anyone with serious experience of time series analysis can see that just by looking at the chart. Representing the standard deviation by a horizontal line is an elementary blunder. Since the movement of the change in the IFO index beyond “one standard deviation” is an important base of Gave’s presentation, his conclusions are very doubtful to say the least.

Nick Jacobs

Aug. 23, 2012, 4:03 a.m.

This is the same Charles Gave whom you quoted more than a year ago (June 25 2011) as saying:

“The Euro will not exist in a year.”

I don’t think we need take his bloviations about Europe too seriously.