Honey, I Shrunk Europe’s Biggest Economy

Image source: Honey, I Shrunk the Kids (The Walt Disney Company)

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.

Originally posted as part of the Finimize daily email.

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