Between Germany And Spain, It’s Give And Take For Europe’s Economy Right Now

Between Germany And Spain, It’s Give And Take For Europe’s Economy Right Now
Paul Allison, CFA

4 months ago2 mins

What’s going on here?

Inflation’s finally cooling down in Germany and Spain, but at the cost of a slowdown in Europe’s biggest economy.

What does this mean?

Europe’s a diverse place: drive a couple of hours, and sangria and paella turn into champagne and escargot. The same is true on the economists’ tour. A trip to Spain features prices that picked up less than expected in October, meaning inflation there held steady from September. Then fly to Germany, and while inflation’s also calming down, the main attraction is the economy’s 0.1% dip in the third quarter versus the second. That’s an ominous sign that Europe’s biggest economy is hurtling toward a recession, which would make it hard for the rest of the region to avoid following suit. Not even a stein of beer and a currywurst will help wash that down.

Spanish inflation

Why should I care?

Zooming out: En Lagarde.

That data at least shows the European Central Bank is starting to win points in its long-fought battle against inflation. And if it stays that way, the bank can slash interest rates to buoy up the region's economy if it does enter an all-out recession. The Federal Reserve, though, still has some hard yards to go. Despite an onslaught of aggressive rate hikes, inflation hasn’t moved for a while and the economy’s still keeping pace, which will only add fuel to the fire and keep prices on the up.

Germany output

For markets: An unfair exchange.

The prospect of higher rates usually floats a country’s currency higher, so you’d think the dollar would be towering above the euro. But the difference between the two is fairly flat versus the beginning of the year. And while the dollar looks decent against its historical standards, it’s way below its standing from this time last year. Here’s what gives: investors are more worried about the massive US debt pile these days, so they aren’t going all-in on greenbacks even though they have a lot going for them.

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