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Investors will smile again soon



LAST Monday, the monthly economic report from the German central bank was released, with a special focus on the economic data during the third quarter. The report, of course, does not contain any specific bid for third-quarter gross domestic product (GDP) growth, but the good news is that domestic consumption and construction still hold up.

Exports were generally poor, although there have also been bright spots in the form of a month with more activity than expected. But if one should conclude briefly, the third quarter GDP growth looks a lot like the second quarter growth, which was -0.1 percent compared to the first quarter of this year.

Everyone in the financial markets has seen the same macroeconomic numbers, so a very modest economic growth in the past quarter will come as no surprise. By definition, if two quarters in a row show a negative growth, then it is a so-called technical recession and it will hit the headlines.

Of course, there is a difference between whether the GDP growth is -0.1 percent or plus 0.1 percent. But I argue that in both situations, consumers and businesses will feel the economic strain. But the discussion about the zero-growth rate, or perhaps recession in Germany, will flare up again on November 14, when GDP growth for the third quarter is announced.

Though the prologue is already taking place on October 31, when Italy publishes its preliminary growth figures for the same quarter, and they won’t be good either. One should not deny that, after all, these two countries are the eurozone’s largest and third-largest economies, which naturally draws global investor attention. But the misery situation does not have to end as badly for investors as one might fear.

The unlucky outlook is already priced in by the financial markets, which is good, as seen from an investor’s perspective. The risk, however, is that the amount of bad news, even the expected ones, can become so huge, that they collectively weigh too much and panic spreads in the financial markets. Though this is not my primary scenario, on the contrary, I expect the headlines with recession to provoke fiscal action in a number of countries, not only in Germany and Italy.

The recession headlines that I expect will force governments to increase public consumption toward the end of the year, though primarily with effect in the first half of next year. Here, it should be noted that mid-sized European countries like The Netherlands and Sweden already are planning a more expansionary fiscal policy by 2020, and I expect that, for example, Italy and Germany will also join the club.

If that wave is going to roll across Europe during the next few months, then I have no doubt that European investors will smile again. Many people have become accustomed to the unknown direction of Britain, but should Prime Minister Boris Johnson maintain his position, my assessment remains that the British government is also prepared to follow the expansionary fiscal path.

The expectations from the International Monetary Fund (IMF) concerning the GDP growth is a dive in particular in Europe this year, though the growth will reverse higher next year.
These expectations actually fit in well with a belief in initiatives and progress in European economies moving into the new year. But even more interesting are the International Monetary Fund’s expectations of the United States GDP growth. The outlook for next year is quite stable and the IMF has even, during this year, increased their expectation concerning the American growth next year.

In the US, economic goodies are also used ahead of presidential elections, which might be included in the financial markets’ expectations, but fundamentally, I am convinced the recession simply won’t appear. The recession has, on the other hand, been expected a couple of times during the past two years among quite a number of economists, and there is still a part of the financial market that speaks about the recession risk in the American economy.

My opinion remains the same, as always, that I regard the US economy as significantly more robust than those who fear a recession and find it very difficult to see a recession in the United States as a real threat. If even more investors shun the recession fears concerning the world’s largest economy, then this should also result in a few extra smiles until the middle of next year– thereafter, the honeymoon might be over.

Peter Lundgreen is the founding chief executive officer of Lundgreen’s Capital. A professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. He is an international columnist and speaker on topics about the global financial markets.

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Today’s Front Page January 27, 2020

Today’s Front Page January 27, 2020