Equities Smashed Following Election; European Growth Estimates Cut; Debt Crisis Hits Germany

It's a sea of red in the US and European equity markets following the victory of president Obama and statements made by ECB president Mario Draghi. US equities are now down well over 2% and most of Europe was down between 1 and 2 %.

Things would not be any different if Romney had won.

Regardless of who won, the global headwinds would have been the same, and the global economy is in a recession already (it's not widely recognized yet, but it soon will be).

Bloomberg reports German Stocks Decline After Draghi Says Crisis Hurting.

German stocks fell as European Central Bank President Mario Draghi said the debt crisis is hurting Europe’s largest economy and the European Commission cut its growth forecasts for the euro area, offsetting optimism about U.S. President Barack Obama’s re-election.

Draghi said the debt crisis is beginning to take its toll on the German economy. “Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area,” he said at a conference in Frankfurt today. “But the latest data suggest that these developments are now starting to affect the German economy.”

Forecasts Cut

The European Commission cut its growth forecast for the euro zone as the debt crisis ravages southern Europe and gnaws at the economic performance of export-driven Germany.

The 17-nation euro economy will expand 0.1 percent in 2013, down from a May forecast of 1 percent, the Brussels-based commission said today. It cut the forecast for Germany to 0.8 percent from 1.7 percent.

Divergences Resolved to Downside

Economists are just now coming around to a position I stated in February and March, that Germany would not be immune from this.

Here is a brief recap.

February 22: Expect German-Periphery Divergence to Resolve to the Downside for Germany

Expect German-Periphery Divergence to Resolve to the Downside for Germany

The idea that Europe can avoid a recession is complete silliness. Europe is clearly in a recession already.

The amazing thing is things have not deteriorated more than they have. Unlike the Chief Economist at Markit, I expect the divergence to resolve to the downside for Germany, not for the divergence to continue for some time. Given conditions in Europe and Asia, the odds that Germany is immune from the global slowdown are essentially zero.

April 4: Eurozone Composite PMI® Signals Recession Says Markit; France in Renewed Decline, German Growth Weakens, Italy and Spain Contract Further

In what should have been expected, but somehow wasn't, Eurozone weakness is across the board except for Ireland bucking the trend for now.

I have been critical of Market analysis for months and this is the worst yet.

First they said Germany would prevent a recession, then Germany would decouple, now they suggest this is only a "technical" recession and the "the recession may be mild and brief".

The European recession will be neither mild nor brief. Spain, Portugal, and Greece are in economic depressions with no end in sight. Spain and Italy (the 3rd and 4th largest eurozone markets) are poised for steeper slides. Germany will not be immune to this as I have stated for months on end.

German manufacturing contracted in March and services sector will soon follow. For some reason, Markit economists cannot figure this out.

Any Growth Too Optimistic

Now the EC economists have finally caught on to the idea this will not be a mild recession and Germany will not be immune. Well sort-of.

The 17-nation euro economy will expand 0.1 percent in 2013, down from a May forecast of 1 percent, the Brussels-based commission said today. It cut the forecast for Germany to 0.8 percent from 1.7 percent.

Both those targets are too optimistic. Germany is going to get hit much harder than these guys think. German exports will collapse.

Q&A

1. How can German exports not collapse with the rest of Europe in a very deep recession and a massive slowdown in Asia as well? 
2. Just who is Germany going to export to?

Those are questions (with obvious answers) that I have been asking since late 2011 actually.

Look at that wimpy projection of .1 percent growth. These clowns just cannot predict recession can they? (even when it is perfectly obvious a major recession is underway).

Still, that is quite the downward revision from 1 percent growth to .1 percent growth.

On the betting line, I'll take the under.

Addendum:

Reader "Bam Man" points out the obvious, but in an exceptionally good way. I offer his comment for others to see:  

The European Commission economists are not in the "forecasting business". They are in the "confidence building" business. As such, it is their duty to "forecast" growth, even if it is obvious that their "forecast" is ridiculous.

Indeed!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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