Is Germany Poised for a Recession?

germanyGermany, long the economic engine of the Europe, has seen its economy weaken sharply in recent months, with its gross domestic product shrinking by 0.5 percent in the final quarter of 2012. Weaker global growth and uncertainty created by the Eurozone credit crisis have prompted companies in Germany to invest less and postpone or cancel planned projects. The country’s traditionally strong export sector has begun to slow, unemployment has been rising, and the Bundesbank now expects the jobless rate to hit 7.2 percent in 2013, up from 6.8 percent in 2012. What do these trends portend for the rest of the Eurozone, which has relied on German stability and support to sustain a common currency in recent years?

Reto Gallati is an author and leading investment expert with an expertise in German economy. While concerned about Germany’s near-term economic prospets, he agrees with the Bundesbank that Germany’s economy (the fourth largest in the world) has significant resiliency, and can rebound quickly provided that Eurozone policymakers push ahead with needed reforms and the global economy begins to regain momentum.

“The sound underlying health of the German economy suggests it has the capacity to overcome recent negative economic trends,” said Gallati. “For example, the respected Ifo Business Climate Index for November saw its first month over month gain since March, suggesting companies in manufacturing and trades were more satisfied with their current situation and slightly less pessimistic about the future.”

Overall, Gallati does not expect Germany to sink into a full blown recession because:

  • The setback in gross domestic product growth is temporary and will impact 4Q 2012 and 1Q 2013.
  • The export industry is already picking up orders from China (second largest economy in the world).
  • The concerns about the bailout plans for the southern countries in Europe are less of a concern than 6 months ago.

How long will it take for Germany to come out of the slump? Gallati anticipates it will take six months until the economic data reflects any improvements. Looking at the stock markets, the DAX has rallied 29 percent since June 2012.

About Reto Gallati
Gallati is the President and CIO of Raetia Investments, LLC. Prior to owning his own firm, Gallati was the head of investments and chief risk officer at Nuveen Investments. In addition, Gallati has held senior positions at several Wall Street firms, including deputy chief risk officer at Putnam Investments and deputy CIO and senior portfolio manager at Goldman Sachs Bank in Zurich.

Gallati has taught at prestigious universities including MIT and the University of Chicago and has authored numerous investment publications. His most recent book Investment Discipline: Making Errors Is OK, Repeating Errors Is Not OK provides best practices in investing, and shows readers how to develop an investment plan based on thoughtful objectives and sticking to it for the long haul, a philosophy that Gallati has developed based on his 30 years in the investment industry.

Gallati earned his Ph.D. in mathematics and finance from the University of Zurich. He graduated from University of St. Gallen where he majored in finance and economics. He resides with his wife in Chicago.