Weekly market recap: Germany’s recession launches bad omens to Europe

Lorenzo Bagnato


26/05/2023 - 18:41

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In the week between May 22nd and 26th markets experienced a serious drop after Germany became the first major economy to fall into a recession.

Weekly market recap: Germany's recession launches bad omens to Europe

The last full week of May started off great, continuing the upward trend that characterized most of the month. On Wednesday, however, everything fell apart as recession finally became a reality and not just a looming fear.

Germany falling into a recession and the Fed expressing their intention to keep raising interest rates were the two biggest market news this week.

But first, let’s look at some numbers to round up the week from the 22nd to the 26th of May:

  • The S&P 500 and the NASDAQ both had slightly performing weeks, with the first rising by +0.19% and the second by +2.20%;
  • The Dow, on the other hand, did not survive Wednesday’s downfall, ending the week at -1,05%;
  • And neither did the European markets, with a visible dip in performances starting from Wednesday. The Frankfurt DAX ended the week at -1.55%, Milan’s FTSE at -2.09% and London’s LSE at -1.67%;
  • Tokyo’s Nikkei too was affected by Wednesday’s dip but managed to rise back ending at +0.59%

Germany falls into recession

The most important market news from the past week is that Germany, Europe’s biggest economy, fell into a recession. German GDP contracted by 0.3% in the last quarter, following another 0.5% drop at the end of 2022.

Germany was among the countries hit the hardest by the energy crisis. The Russian invasion of Ukraine meant Germany could not rely on gas from Moscow anymore. Their decision of shutting down their remaining nuclear power plants exacerbated the issue.

In 2022, German Chancellor Olaf Scholz announced the government’s intention of raising €200 billion in sovereign debt to help citizen pay their bills. This helped the country power through the winter but also accelerated its path to economic stagnation.

In fact, Germany’s inflation remains high as well at 7.2% in April. A scenario, according to most economists, that will spill over to the rest of the European Union.

The Fed will continue interest rate hikes

On the other side of the Atlantic, the Fed changed its mind again. The American Federal Reserve has been going back and forth between maintaining interest rates stable and keep raising them. In the end, the Fed always chose the latter option.

After this month’s increase, the Fed assured it would have been the last. According to Jerome Powell, Fed’s chairman, interest rates would have remained stable until core inflation was decisively lowered.

But while general inflation in the US is coming down (in fact, more than expected), core inflation remains a spine in the Fed’s thorn.

Furthermore, the American economy and the US job market seem rock solid, again more than forecasted. Therefore, the Fed will likely go back on its word and raise interest rates once again in June.

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