Euro dives on strong GDP figures

The continues to come under pressure in today’s trading session against the US dollar on rising expectations that the Fed would remain in a hawkish mode after a solid round of GDP figures from the US while confirmation that German economy was in recession in the first quarter of 2023 only added to the woes.

Data from the German statistics office on Thursday showed a downward revision to GDP (gross domestic product) from zero to -0.3% for the first three months of the year.

This comes after Germany recorded a 0.5% contraction in the last quarter of 2022. Two consecutive quarters of negative growth define a technical recession.

Europe’s largest economy has been under significant pressure, particularly in the wake of Russia’s invasion of Ukraine and the subsequent decision of European leaders to cut ties with Moscow.

According to the statistics office, German households spent a lot less in the first quarter, with final consumption expenditure falling 1.2 percent over that period, as consumers were reluctant to spend their cash on clothing, furnishing, cars and so on.

“Germany did fall into recession at the end of last year, after all, as the shock in energy prices weighed on consumers’ spending,” noted Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics

The latest economic development takes place against a backdrop of high inflation and high interest rates across the region. The European Central Bank is expected to raise rates again at its next meeting on June 15. The central bank has lifted its rates by 375 basis points since July.

German Central Bank Governor Joachim Nagel said earlier this week that the ECB has “several” more rate increases ahead. He is one of the most hawkish members of the central bank.

We expect further weakness from here, higher interest rates will continue to weigh on both consumption and investment and exports may also suffer amid economic weakness in other developed markets. Our forecast is for further contractions in the third and four quarters,” said Franziska Palmas, senior Europe economist at Capital Economics.

The situation creates a big dilemma for the European central bank who on the one hand need to keep raising interest rates to reign in record inflation but also have to be mindful of further derailing the European economy with higher borrowing costs.

The real Gross Domestic Product figures from the US expanded at an annualized rate of 1.3% in the first quarter according to the US Bureau of Economic Analysis on Thursday which was above expectations for a figure of 1.1 percent. This all but guarantees the US Federal Reserve will deliver another rate hike next month.