When is the next recession coming? If you are in Germany, you might already have missed it. Numbers for Germany's gross domestic product (GDP) in the fourth quarter of 2018 are due to be published, on February 14, just in time for Valentine's Day. That's when we will know whether Germany has slipped into a "technical" recession in the second half of 2018. Such a recession is defined as two consecutive quarters of negative growth.
Above all, this shows how absurd the widespread definition of a recession is. According to this, a 0.1% drop in GDP in two quarters would be a recession, while a five times larger drop in economic output of 1% in one quarter, followed by zero growth the next, would not be a recession. That is why the economists tend to prefer a broader definition. Recessions simply mark periods when resources are underutilized.
That does not appear to be the case in Germany. In the third quarter, the automotive sector in particular suffered; since the beginning of the fourth quarter, orders have risen again, which suggests a recovery in production at the beginning of 2019. In December, construction output slumped by 4%, which could drag the fourth quarter into the red. But even if we have a lot to worry about, we do not believe the German construction industry is one of them.
However, as far as 2019 is concerned, we should not become too calm. The falling yields on German government bonds are giving pause for thought. This applies both to the nominal yields on German government bonds and to the yields on inflation-indexed longer-dated German government bonds, as our Chart of the Week shows. The difference between real and nominal yields, the so-called inflation break-even rate and an indicator of inflation expectations, has also fallen – in the ten-year maturity range even to a new two-year low. All of these are hardly signs of economic dynamism. Since January of this year, the European Central Bank (ECB) has also stopped net new purchases of securities as part of its purchasing program. That should actually have pushed yields upwards.
However, signs of weakness in the Eurozone, from the falling Ifo index and significantly lower retail sales in Germany in December 2018 to weak purchasing managers' indices in France and Italy are now accumulating. Then, there are various political risks, from the Brexit chaos to trade conflicts. "Should the growth prospects actually deteriorate significantly, it cannot be ruled out that the ECB will resume its bond-purchase program with net purchases. This would cause the prices of all bonds, including Bunds, to rise further and yields to fall further," explains Ulrich Willeitner, Senior Portfolio Manager of DWS for European bonds. This shows that central banks and recessions might have something in common with more conventional Valentine's Day surprises. No matter how long you think ahead and how carefully you plan: something can always go wrong.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 2/7/19