Germany, World’s Fourth Largest Economy, Plunges into Recession

New Delhi: The euro experienced a decline on Thursday as Germany, the largest economy in Europe, was confirmed to be in a recession. Meanwhile, the dollar reached a two-month high, benefiting from safe-haven demand as concerns grew over a potential US default.

Economic weakness in Europe and China contributed to the euro’s decline. Germany’s recession, with negative growth in the fourth quarter of 2022 and a slight contraction in the first quarter, highlighted the sluggish momentum in the European economy. Signs of weak consumer demand in China indicated that the post-pandemic recovery had reached its limit.

Reduced expectations of Federal Reserve rate cuts supported the dollar. The US economy has shown resilience to the effects of the central bank’s aggressive tightening campaign, leading to a shift in market sentiment. Money market traders have scaled back their projections of rate cuts, now anticipating only a quarter-point reduction in December.

The yuan reached a six-month low as China’s economic weakness persisted. Disappointing economic indicators pointed to subdued consumer demand, suggesting that the recovery had already run its course. The People’s Bank of China (PBoC) showed little intention of defending the yuan, leading to increased pressure on the currency.

Australian and New Zealand dollars also weakened. The close trade ties between these countries and China made them particularly vulnerable to China’s economic weakness. The Australian dollar reached a 6 1/2-month low, while the New Zealand dollar experienced a slide following the central bank’s unexpectedly dovish stance.