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Germany could enter a recession but this would actually be good for Europe, economist says

Key Points
  • Germany could enter a recession by the fourth quarter of 2019, Saxo Bank believes
  • But this could ultimately benefit the region if Germany spends more.
  • Political headwinds could also be an opportunity for change.
Kirsztian Bocsi/Bloomberg via Getty Images

Germany could enter a recession by the fourth quarter of 2019, but this could prompt a key period in the continent's economic evolution that could ultimately benefit the region, according to one investment bank.

Seen as the traditional growth engine of Europe, German politicians called for strict austerity measures in southern Europe after the euro zone debt crisis of 2011. But with the country now experiencing its own economic woes, Denmark's Saxo Bank believes that Berlin could kick start spending and investment and radically change Europe's economic environment.

"It's gets them back in the game," Steen Jakobsen, chief economist and chief investment officer at Saxo Bank, told CNBC's "Squawk Box Europe" Tuesday. He highlighted that a rise in populist parties at EU elections in May, the impending departure of Angela Merkel as chancellor and a change of presidents at the European Central Bank (ECB) would all accentuate this dramatic shift.

"We firmly believe that any macro change has to come from a breakdown or a crisis, and as such we see 2019 and 2020 as key years for Europe's evolution … Germany grew too complacent, and so did the EU as a whole. Now the new reality has to see Berlin expand spending to be of benefit to the rest of Europe. Overall, a new common ground will be found from a more fragmented Europe," the Danish investment bank said in its latest quarterly outlook.

Germany has been catching economists' attention since it posted a contraction in growth in the third quarter and then flat growth in the fourth quarter of 2018, narrowly avoiding a technical recession. The growth slowdown has been attributed to upheavals in the nation's traditional growth driver, its car industry, and a wider global slowdown affecting demand.

Germany recorded the world's largest current account surplus, which measures the flow of goods, services and investments, for a third year running in 2018 due to its strong export-orientated economy, but the risk of U.S. tariffs on European car imports has damaged industry confidence. Germany has been repeatedly criticized for not using its surplus to boost public spending and investment.

Jakobsen believes that the "collapse of German growth" is firmly in the spotlight and said in the research note that there is a risk of recession there by the fourth quarter of 2019, even without a trade spat with the U.S. He added that Germany's successful economic model — which focuses on manufacturing and exports — would ultimately need to be updated.

"We think the slowdown in Germany — Germany being stuck in the industry 3.0 model — will lead to a Europe that has more desperation, will look more like a basket case during the summer after the European elections," he told CNBC.

"But that will itself set up a process where Germany becomes part of the solution rather than having this fight of austerity versus loose monetary (policy) from the ECB and fiscal spend from the southern (euro zone) countries," he added.

Saxo Bank's report noted that large declines in core European industrial production data can be observed, especially in Germany, which accounts for one-third of European industrial activity. In its latest winter forecasts, the European Commission predicted that Germany will grow a lackluster 1.1 percent in 2019, and forecasts 1.3 percent for the 19-member euro zone as a whole. Global growth is slowing too and is predicted to be 3.5 percent in 2019, according to the International Monetary Fund.

Saxo Bank argues that Europe is "perhaps the least well-positioned economic bloc for the global slowdown we see coming."

"When the global economy goes into a soft patch or worse, it is the surplus economies most leveraged to global demand that suffer the most. Given that Europe is the only major economic bloc running a large aggregate surplus, it – and Germany in particular - is particularly poorly positioned for a global growth slowdown."