Germany’s Economic Downturn: The Fourth Strongest Economy Struggles
News last week was dominated by headlines about the economic downturn in Germany, the globe’s fourth strongest economy. German consumers, faced with a period of heightened inflation, seemed to have exhausted their resources. Recent figures show the inflation rate in the country dropping to 7.2%, with food and electricity costs showing a staggering increase of over 15% compared to the previous year. This situation marks a stark contrast to the prior two decades, during which inflation averaged around 1% until its abrupt escalation in January 2021.
Defining Recession: A Contention in the U.S.
In retrospect, the causes of the recession appear evident. Germany has entered into an economic downturn after experiencing two successive quarters of Gross Domestic Product (GDP) decline. Meanwhile, the criteria for determining a recession in the U.S. has been a contentious topic, sparking a debate less than a year ago.
In July 2022, NPR posed the question if America was in a recession following two consecutive quarters of economic shrinkage. Preliminary estimates reported a GDP contraction of 0.9% in Q2 2022, followed by a 1.6% decline in Q1. Despite this, President Biden, along with other White House officials, negated the idea of a recession, citing other economic indicators that suggested the economy was still on a growth trajectory.
The Role of Economic Indicators in Identifying a Recession
Fast forward nearly a year, and we know these officials were correct: two quarters of economic decline was not definitive proof of a recession.
In the aftermath of last year’s debate, we learned that the identification of a recession is dependent on several indicators, which include:
- Real personal income excluding transfers.
- Nonfarm payroll employment.
- Real personal consumption expenditures.
- Wholesale-retail sales adjusted for price fluctuations.
- Employment gauged by the household survey.
- Industrial production.
The National Bureau of Economic Research emphasizes that there are no strict guidelines on which measures are important in decision-making or how they should be evaluated.
If you’re keen on understanding the complexities of the economic downturn and financial literacy’s role in it, our earlier post titled ‘Empowering Communities Through Financial Literacy and Investment Awareness’ offers valuable insights. The post explores how financial literacy and investment awareness can empower individuals and communities, helping them navigate through such challenging economic times. Check it out here.
The Paradox of Economic Indicators: Historic Highs at the Onset of a Recession
Most of these markers are currently at or near historic highs and on an upward trend. This has led economists to refute the claim that we are in a recession. However, a paradox lies in the fact that these indicators often reach record highs at the onset of a recession.
To pinpoint the start of a recession, economists seek signs of weakness in these indicators. This implies that the determination is always retrospective, often being officially declared eight months into the downturn.
The Delayed Official Recognition of a Recession: The Hidden Impact on Consumers and Investors
It’s noteworthy that the following table doesn’t include the 2020 recession due to its unique circumstances.
This leads to the implication that consumers and investors endure the hardships of a recession for several months before economists and policymakers concur that the distress is palpable.
Excluding the 2020 recession, stocks experienced a decline between the inception of the recession and its formal announcement four out of five times. During these periods, bank stocks suffered considerably, averaging a loss of 13%, with the most severe loss being 39% in 2008 and the best case being a 6% surge in 1980.
The Vulnerability of Banks During Economic Declines
Banks are particularly susceptible during these phases as the economy shrinks while data fails to validate this contraction. This ambiguous situation can lead bankers to make erroneous decisions.
The enigma of this situation was famously encapsulated by Citigroup’s CEO in July 2007. Even though the recession hadn’t officially commenced then, the housing market and stocks were already in decline. The New York Times reported that the CEO used a metaphor to explain the significance of continuing operations as long as there is sufficient liquidity, even when anticipating future challenges. The CEO acknowledged that addressing these challenges could potentially lead to decreased profits and loss of clients.
Adam O’Dell’s Strategy for Navigating Economic Downturns
Today, banks are still metaphorically dancing. Historic precedents suggest that the situation will not only become complex but also worsen.
This is why Adam O’Dell and his team have been meticulously monitoring the financial banking sector, and they are preparing for the worst that is yet to come. They have developed strategies to help prepare for the impending end of the metaphorical music and subsequent bank failures.
Adam released his list of 282 American financial stocks that he advises to sell now, including four that are at high risk of collapsing. However, merely managing risk during a time of increasing inflation isn’t sufficient.
Adam is also demonstrating how to conduct “off Wall Street trades” on several companies facing significant systematic risk, offering the opportunity to accumulate wealth amid the crisis. All the pertinent details, including the four companies that may hold your deposits, can be found here.
Rising U.S. Mortgage Rates Amid Debt Ceiling Turmoil
Amid the turmoil surrounding the debt ceiling, U.S. mortgage rates have been silently escalating for weeks. The average 30-year rate is now at 6.57%.
Despite being below the 7.1% peak of last November, rates have been steadily increasing for most of this year, especially over the past six weeks.
How Increasing Mortgage Rates Affect the Ability to Afford a Home.
Higher rates reduce home affordability, particularly for first-time buyers who may not have sufficient funds for a down payment.
To illustrate: A $500,000 house with a $450,000 mortgage at 3% would yield a monthly principal and interest payment of $1,897. At today’s 6.57% rates, that payment would rise to $2,865, nearly a $1,000 increase on the mortgage alone.
The Stability of Home Prices Despite Economic Shocks
Nonetheless, the impact on home prices has been relatively minor… and might have reached its limit.
The Case-Shiller Home Price Index values for March released this week indicate a rise in home prices for both February and March, following a series of declines beginning in June of the previous year.
Specific regions, such as San Francisco, are feeling the crunch due to tech layoffs over the past year. But, nationwide, home prices have remained fairly stable over the past year, with a modest decline of only 3.5% from their peak.
Is the decline in home prices at an end?
The answer might hinge on whether we finally enter the long-anticipated recession.
However, given the persistently tight supply, we shouldn’t anticipate a significant reduction in prices… at least not in the near future.
For an in-depth analysis of the current economic indicators and their implications, visit Bloomberg’s Economic Analysis page. Here, you’ll find data-driven reports and discussions on various economic aspects, offering a broader understanding of the economic downturn and potential future trends.
