DAX Index gains as German economy recovers faster than expected

DAX Index gains as German economy recovers faster than expected
Written by:
Michael Harris
23rd September, 11:48
  • The expectations for GDP are to drop by only 5.2% in 2020, lower than previous forecasts of a 6.7% decline
  • The DAX index fell nearly 5% on Monday to record the worst daily performance since March
  • Sellers eye a trip to 12,450, where the 200-DMA is located

The DAX Index has rebounded over 1.5% today after recording the worst single-day performance since March. The latest data from Germany shows that the country is dealing with the coronavirus-induced recession better than originally anticipated.

Fundamental analysis: GDP projections upgraded 

Amid a significant slowdown in the economy due to the pandemic, Germany was quick to increase spending and that capital, together with the stimulus from the European Central Bank has substantially mitigated the pandemic’s blow. 

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The expectations for GDP are to drop by only 5.2% in 2020, according to Ifo Institute’s estimates. This is lower than its previous forecast of a 6.7% decline and the Bundesbank’s forecast of 7.1%. 

“The decline in the second quarter and the recovery are currently developing more favourably than we had expected,” Timo Wollmershaeuser, Ifo chief economist, said.

As for the 2021 estimates, Ifo reduced its growth estimates 5.1% from 6.4%, but even in that case the country’s economy could return to its pre-pandemic level by the end of next year. The European Central Bank believes it will take an additional year for the whole eurozone to fully recover.

One of the reasons for the improved forecasts is the surprisingly resilient consumption, and the HDE retail association believes nominal retail sales will rise by 1.5% this year, a substantial forecast change compared to its previous estimate of a 4% drop.

Still, both HDE and Ifo about uncertainties in their forecasts, as there’s a risk of a new wave of infections and possible lockdown measures.  

When compared with other large economies, unemployment in Germany has hardly increased and there’s a chance that the unemployment rate in the country might be only 5.9% this year, compared to 5.0% from 2019. Ifo also expects the jobless rate to fall to 5.7% next year. 

Technical analysis: Index rebounds

The DAX 30 index is trading nearly 2% higher today to erase a portion of Monday’s losses. The index fell nearly 5% on Monday to record the worst daily performance since March. At the end of the last month, the index came close to matching record highs set in February. 

DAX Index daily chart (TradingView)

More importantly, the index has now broken below the ascending trend line at 12,950. This break has accelerated losses as the sellers eye a trip to 12,450, where the 200-DMA trades at. 

Summary

Recent data from the private sector shows that Germany is coping with coronavirus effects better than expected. As a result, the DAX Index erased a portion of losses from Monday, when it plunged nearly 5%. 

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