What's going on?
Economists warned on Monday that Germany’s economy could shrink next year.
What does this mean?
Germany’s robust economy did shrink in pandemic-plagued 2020, it’s true, but those were extremely hard times. But it doesn’t look like the next year will be any easier on Europe’s biggest economy: extortionate energy prices – a result of Russian restrictions – have been taking their toll on Germans’ disposable incomes, and Munich’s Ifo Institute believes those prices could tip the country’s inflation to average 8.1% this year and 9.3% the next. That’s a big blow – big enough that the economic research group doubts the government’s $65 billion relief package will do much to offset the hit. Everyday folk will be left with less cash to splash on nice-to-haves, then, which won’t help the shortage-stricken economy. That might be why the institute predicts the German economy will grow just 1.6% this year before shrinking 0.3% the next – only growing again when 2024 comes around.
Why should I care?
For markets: The US is safer…
Germany’s the rule rather than the exception, with much of Europe facing similar problems. That’ll be why Goldman Sachs thinks investors should take a break from the “dire” situation across the region, and said on Monday that US firms – mainly ones that mostly do business within home borders – are a better bet for higher returns. Looks like Goldman might be onto something: an index tracking a group of US firms with heavy links to Europe has underperformed one tracking mainly domestically-trading US firms by around 20% this year.
For you personally: …But not that safe.
Still, there are major economic risks in the US as well as Europe, which might be why Goldman advised cautious investors to own more dividend-paying stocks with strong balance sheets and stable earnings growth. That way, investors can bring in a regular stream of income that’ll see them through any upcoming slumps in stock prices.