What does this mean for investment markets?

This is a difficult question to answer definitively but we can perhaps make some assumptions based on the EU's largest economy, and the third largest in the world, Germany.

When we look at Germany’s major trading partners below, we start to again an understanding of the potential impacts that may arise.


We make the following brief comments:

• According to Eurostat, Germany is the second largest exporter in the World (behind China). From the charts above, it is highly dependent on EZ trade with most of its exports going to France, UK, Netherlands and Italy. Interestingly, China is not in the top 10, although the United States is second behind France.
• Germany is also a large global importer, with most goods and services imported from Netherlands (1st), France (2nd), China (3rd) and the United States.

There seems little doubt that intra EZ trade will be impacted by the slowdown in demand that will emanate from those highly indebted EZ countries. This does not augur well fro Germany and, by extension, the EZ given that 3 of Germany’s 4 biggest customers are other EZ nations. We can therefore only conclude that the medium term prospects for growth in the EZ are likely to be subdued at best.

In regard to the rest of the world it should be noted that the world’s largest economies the United States and China also rely heavily on the EZ for buying its products. The EU continues to rely on the United States for most of its export growth and visa versa. The EU imports more goods from China than any other country (the United States is 2nd) but is not a large exporter to China (relatively speaking). It follows that EU growth prospects are somewhat tied to the fortunes of the US economy more so than the fortunes of China’s economy. In contrast, China exports more goods to the EU than any other area.


So, in conclusion, subdued growth rates expected out of the EZ are likely to have some impact on the United States and China as both countries have a moderate reliance on the EZ to purchase its exports. Domestic demand though remains a key driver of GDP in both China and the United States so, on balance, we do not expect any slowdown in the EZ to necessarily materially impact global growth. Furthermore, given Australia’s relatively nominal trade relations with the EZ, we do not envisage any major impact on our own economy. Australia’s prospects remain tied to continued growth in the Asian region, in particular China.

Nevertheless, it is conceivable that a deterioration in the sovereign debt situation in Europe could lead to further impairments in the global banking sector which could increase funding costs generally. Such an impact, would of course be detrimental to global growth (and sharemarket returns), including Australia, generally. It should not be forgotten that the United States Government itself remains heavily indebted and faces its own challenges in coming years. For these reasons, caution remains warranted.

For more information please do not hesitate to contact one of the following members of our Wealth Management team:

Charlie Viola
Director
+61 2 8236 7798

Martin Fowler
Director
+61 2 8236 7776

Haris Argeetes
Manager
+61 2 8236 7851


Disclaimer
The information provided is not personal advice. It does not take into account the investment objectives, financial situations or needs of any particular investor and should not be relied upon as advice. While the information is provided in good faith and believed to be accurate and reliable at the date of preparation, we will not be held liable for any losses arising from reliance thereon. We recommend investors consult their personal financial adviser to discuss suitability and application to their individual circumstances. The article represents the views of the author, Martin Fowler, which are not necessarily representative of Moore Stephens Sydney generally.