There has been endless talk by pundits about Europe finally recovering into a sustainable economy… and we said “bunk” from the very beginning.
We’ve also stressed how Germany will experience one of the steepest dives in demographic trends of any developed country in the world. It will occur over the next nine years — 2014 to 2022. Back in the 1990s, Japan’s sharp declines in trends showed us a collapse was coming even when Japan looked invincible in 1989.
Mario Draghi, president of the European Central Bank, came up with a big QE2 injection in Europe in late 2011 and early 2012. It was more of a concentrated short-term injection of over $1 trillion vs. our Fed’s more recent $100 trillion a month.
But other than that, he has largely talked a big story about blasting anyone who dared to short sovereign bonds over there. It’s worked to an extent with bond yields so low in clearly bankrupt countries… Spain’s are nearly as low as the U.S. now.
In my book The Demographic Cliff, I describe Japan and its “coma economy,” and now Europe is reflecting that same scenario with negative 0.1% growth since early 2011.
As we forecast, Europe is slipping back into recession after all of the claims of a recovery in process — what wishful thinking. The statistics are proving otherwise.
The only countries finally showing modest recoveries were the ones that got all the free bailouts and artificial support: Greece, Portugal, Spain and Ireland. Now great signs of weakness are becoming noticeable in the countries that did the bailing out and that is much more dangerous in the long term.
Italy fell back into a recession quite a while ago. Since Q3 of 2011, Italy has had negative real GDP except for Q4 of 2013, which showed signs of an increase with an average growth rate of negative 1.45%. But that one positive quarter saw only 0.5% growth. The worst was in Q1 2012 with a 4.2% decline. No wonder Draghi stepped up his QE2.
And now Germany and France look to be next. Germany just reported its first negative real GDP since Q1 2013 with a decline of 0.64%. Its average growth since Q2 2011 has been a mere 0.71% despite being seen as the bulwark of Europe.
If its GDP continues negative in the third quarter, Germany will officially be back in a recession. That seems to be a slam dunk to us and not a surprise that Germany is weakening without anyone expecting it.
If economists don’t look at their demographics, how would they see it?
France looks to be headed into a recession as well, after showing a decline of 0.1%. Its average growth has been a paltry 0.35% despite more buoyant demographic trends.
The U.K is also showing a substantial demographic drop-off over the next decade, though not as steep as Germany’s. But since it is the financial center of Europe and it sports the highest debt ratios by far of the major countries in Europe, I expect BIG problems to develop there. Its economy has been the strongest with 0.82% Q2 real GDP growth and has averaged 0.39% since Q2 2011.
So, let’s look at the big picture for the euro zone in the chart below and keep in mind that the worst countries with declining demographic trends are Germany, Italy, Greece, Portugal, Spain and Austria — in that order.
The euro zone real GDP has been weak since Q2 2011. Since then it has had seven quarters showing modest upturns and six quarters dipping down. The average growth has been a negative 0.1% throughout the past three years with its best quarter being positive 1.2% and the worst showing negative 2.1%.
The inflation rate peaked in early 2012 at 3% only to drop down to 0.4% in July. And it does look like it will keep dropping into deflation territory again. That will set the scene for the next big stimulus program there.
In Q1 of 2009’s global financial crisis, it was down 11%. That compares to negative 17% in Germany, negative 14% in Italy, negative 7% in France, and negative 2.5% in the U.K.
Did no one notice that Germany took it in the shorts more than any major country in Europe in 2008/2009? I’m forecasting that will happen again!
Germany has one of the highest exposures to global exports in the euro zone. It also has the worst demographics of the larger countries, especially from 2014 to 2022. A decade ago, we would have predicted that Switzerland would see a demographic cliff almost as bad as Germany’s.
Switzerland’s safe-haven status and stronger economy are major factors in the immigration boom they have been experiencing since 1998 with a strong increase in 2010.
Germany’s immigration only began to increase in 2010 and due to that it won’t even come close to offsetting its massive demographic cliff. Germans will tighten up fast on immigration if a recession continues to set in as we fully expect.
Austria has closed its demographic cliff somewhat with rising immigration at a stronger rate than Germany, but not nearly as strong as Switzerland’s.
Yes, immigration is good for a country, especially if they can attract high-quality immigrants like Australia, Canada and Switzerland.
As most countries continue to restrict immigration, the world economy weakens. Immigration restriction affects just like trade wars do and this will only make the global depression worse.
When will we ever learn?
Prepare to see a downturn in Europe that will be worse than in the U.S. and it will last beyond 2020 when we could start to bottom. If you are aggressive and want to short one country… go for Germany after their stellar rebound and new stock highs and less than 1% 10-year government bond yields.
Most countries have demographics that never turn up for decades. After the great crash ahead, the countries that will look good are Switzerland, Norway, Sweden and Ireland. France and the U.K. will look OK at best. But as for the rest of Europe, it will not be the place to invest. Germany, like Japan after 1989, will never be the same again.