Germany could enter a recession but this would actually be good for Europe - Saxo Bank

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 Steen Jakobsen, chief economist and chief investment officer at Denmark’s Saxo Bank.

“It’s gets them back in the game,” Jakobsen told CNBC’s “Squawk Box Europe” on 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 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.

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 (Eurozone) countries,” he added.