Big Brother Germany Growing No More?

After leading the euro zone out of the recession, Germany’s economy is expected to have stagnated during the fourth quarter as early estimates are for a mere 0.1% growth… which is pretty much no growth at all! Remember, Germany’s GDP grew by 0.7% in the third quarter on the strength of quantitative easing measures. Could this be a sign that the recovery is still unstable? Could Germany be in line for a double dip recession?

Let’s take a look at recent data that indicate why such a dismal figure is expected:

I busted out my research gloves and found out that recent German data points to a less-than-stellar outing during the last saga of 2009. While Germany’s retail sales grew by 0.8% in December, its factory orders showed a 2.3% slack for the same period, indicating that consumer demand for the upcoming months may not be sustainable. In fact, December’s uptick in retail sales could very well be just a result of the seasonal holiday buying.

Furthermore, German consumer confidence for the quarter has declined, as ZEW index fell from 56.0 in October to only 50.4 in December. Now, if consumers felt that the economy’s outlook was becoming less optimistic, this could have affected their buying patterns and kept them from spending more than they normally would.

Looking at trade balance data, while Germany was able to post a handsome 3.0% gain in exports in December, imports still outpaced it, growing 4.5%. As a result, the country’s trade surplus, which directly adds to its total GDP output, shrunk to €13.5 billion from €17.2 billion.

Coupling this with the recent developments of Greece (which I talked about in my blog yesterday), it’s no surprise that market participants have been bearish on the euro as of late. Remember how I told you that the debt crisis in Greece has caused the EURUSD to plummet by almost 1500 pips? Well, it seems like Germany finally understood that Greece’s problems are their problems too since they just announced their plans of extending a helping hand to Greece.

Seeing how risk aversion has been propped back into the minds of traders, the results of the upcoming GDP report will probably be something to watch out for. It could serve as a signal of how capable Germany will be in helping Greece out. A better-than-expected figure may give currency traders more reason to believe that Germany is indeed ready to play the role of hero, which would help ease the overpowering aversion to risk.

On the flip side, ugly results on the GDP report could be the proverbial final straw that would break the EUR/USD’s back, especially since the pair is already treading a significant Fibonacci level right now (hint: see Big Pippin’s Daily Chart Art today!).

However, further euro weakness could be harmful for Germany’s GDP. It turns out that the recent euro weakness has been driving the monetary value of German exports lower in the short term. In fact, the lower value of the euro could even offset the effect of a possible increase in export volume in the past couple of months. Since exports comprise a chunk of a country’s GDP, lower export value could lead to lower GDP. Germany could use a rise in the euro’s valuation to boost its economic growth figure and, although concrete plans for a Greek aid package are still Greek to me (pardon the pun), a fix for these debt woes could do just the trick.