Europe Preview: German Economy Headed for Trouble?

Europe’s first-quarter GDP growth was surprisingly strong, with Germany in particular benefiting from booming exports to the emerging world.

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Unfortunately it does not look like that will continue.

GE’s head of GE International, Nani Beccalli, says economies like China and India are beginning to feel the impact of the credit crunch. If that trend accelerates over the coming months, German exports and growth could evaporate.

On Tuesday, the closely watched investor sentiment index from the ZEW showed money managers are turning negative on the euro zone's biggest economy. Investors are concerned that inflation, added to a strong euro, will be bad news for the exporters.

On Wednesday, we will see if the German business community backs that view when the IFO Index is unveiled at 10:00 CET.

April’s reading was surprisingly weak. ING said the reading was a wake-up call for those who believed in decoupling and thought the “German economy would be able to shrug off the financial crisis and the U.S. slowdown”

Matthias Köhler from the ZEW told CNBC that the ECB will have to raise rates amid soaring inflation, which in turn boosted the euro today. If he is right, German industry could suffer.

One of GE’s main competitors is Germany’s Siemens , and if economists have been slow to come around to the idea that German exports will weaken, those trading Siemens have not. The stock is off 30 percent since the turn of the year, and while some of those losses may be down to the group's well-documented corporate governance problems investors appear to be betting that soaring new order growth is set to slow.

CEO Peter Loescher told us at the end of April that he is “guardedly optimistic” about the second quarter but warned the crisis in the financial sector could spill over into other sectors. If that proves to be the case, then his “guarded optimism” and German export growth could be a thing of the past.

BoE’s Blanchflower has Brown's Backing

When Gordon Brown made the Bank of England independent following New Labour’s election victory in 1997, he could not have known that 11 years later he would find himself pleading with the MPC to cut rates. But with the only thing heading south quicker than the UK economy being Gordon Brown’s poll ratings, the prime minister has been telling anyone who will listen that he hopes the BoE will do just that.

So when the Bank of England governor was recently forced to write to the government to explain why UK inflation had topped 3 percent, Brown probably called back and told Mervyn not to worry. What’s 3 percent inflation between friends?

Tomorrow the Bank of England will report minutes for its May meeting, which saw rates left on hold at 5 percent. Analysts polled by Reuters believe that only one member will have called for a cut and rather unsurprisingly it is expected to have been Danny Blanchflower.

Blanchflower believes Britain could enter recession with house prices falling by more than a third unless rates come down aggressively. The market believes inflationary pressures will see rates left on hold until the end of the year. If that is the case a Scottish politician with 10 years experience working at the UK treasury and a rather unsuccessful record in the top job could be about to enter the job market.