As I predicted in a message to Credit Writedowns Pro subscribers on Monday, statistics have shown that the German economy has finally succumbed to the deflationary economic policy of the euro zone.
Germany showed first signs of feeling the pain from the euro zone’s debt crisis as the economy shrank in the last three month of 2011, despite outperforming its peers for main part of the year thanks to strong domestic demand and exports.
Gross domestic product (GDP) grew 3.0 percent in 2011, preliminary Federal Statistics Office data showed on Wednesday, below the previous year’s growth rate of 3.7 percent — the fastest since reunification — and in line with a Reuters poll estimate.
But GDP contracted by around 0.25 percent in the fourth quarter of 2011, an official from the Statistics Office added.
"Germany cannot isolate itself so easily from tensions within the euro zone. In addition the export sector is facing a difficult period given the fall in global demand," said Joerg Zeuner, chief economist at VP Bank.
I have been sounding the alarm bell since summer as this is something I said as early as March 2010 would eventually happen when the sovereign debt crisis became acute. Spain [and Italy]’s debt woes and Germany’s intransigence lead to double dip. That’s because Q1 will also be negative for the German economy.
The eurozone is in a recession right now. And it is the banking sector where downside risk lies. I stick by wrote in early October at the New York Times:
All indications are that Europe is already in a double-dip recession…The sovereign debt crisis and the fiscal consolidation implemented to deal with it have taken their toll.
None of the current signals indicate the situation will improve without policy support.
One would not be overstating the case in drawing parallels to the fateful events in 1931 that spread from the Austrian bank Credit Anstalt to the rest of the European banking system and into the U.S., creating bank runs and depression. Until the banks take substantially more credit write-downs and recapitalize, this crisis will continue and get worse.
All of the risk is to the downside here in my view. Will the US also double dip? What about China’s faltering housing and stock markets –can they prevent a hard landing? And what will this mean for investors?
I intend to address all of that today in this week’s newsletter on protecting your wealth in a world of recurring crisis and downside risk. I will have a lot more to say about the situations in Europe, the US, China, India and Brazil as well as on oil and Iran there.