GERMANY - Germany is on the brink of slipping into a 1930s-style recession and investors should approach the market with caution, State Street Global Advisors warns.
Group chief investment officer Alan Brown believes fund managers need to keep a close eye on the German economy this year.
He said: “The only way Germany can get its effective exchange rate down is to have an inflation rate lower than the rest of the eurozone for an extended period. This means running an inflation rate perilously close to zero.”
Brown explained that the policy mix in Germany today looked “remarkably similar to that of the late 1920s” when real interest rates were kept high and fiscal policy was tightened.
But he warned: “The combination of an overvalued exchange rate and an overly-tight monetary and fiscal policy helped to create the depression of the early 1930s.”
He also pointed out that Germany was restricted by the “stability and growth pact” – of which it was the principal architect.
The country’s budget deficit is already breaking the 3% limit set by the pact.
Brown said: “The government is now attempting to trim its deficit through a combination of expenditure cuts and tax increases, all at a time when nearly every economic indicator is pointing south.”
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