Is Germany ’s fourth quarter economic contraction a signal that the nation is headed into a recession? After a January 15  report from Destatis  disclosed that that the German economy contracted by 0.4 percent during the fourth quarter of 2012, Economy Minister Philipp Roesler reported that the Ministry’s forecast for the nation’s 2013 GDP growth was lowered from 1.0 percent to 0.4 percent (NYSEARCA:EWG).  The gloomy outlook enhanced concerns that Germany could be on its way into recession.  Most economists consider two consecutive quarters of economic contraction as the determining criteria for a recession.  Germany has particular reason for concern because its economy is primarily export-based.  As the euro continues to strengthen, Germany’s exports become less competitively-priced in overseas markets (NYSEARCA:FXE).  Bundesbank President Jens Weidmann has recently been quite vocal in his criticism of the debasement of the Japanese yen (NYSEARCA:FXY).  The fear that less-expensive Japanese products will overwhelm international markets is obviously of great concern to the German government.   Carry Trade Not What It Used to Be On January 23, the International Monetary Fund released its  World Economic Outlook Update , which included an expected annual German GDP expansion of only 0.6 percent during the entire calendar year 2013, with 2014 GDP expanding by 1.4 percent.  If Germany’s GDP will expand by only 0.6 percent during all of 2013, what can we expect during the first quarter of 2013?  A negative GDP report will put the nation in recession.   Why Germany Wants Its Gold Back On January 31,  Destatis reported  that the nation’s retail sales fell by 1.7 percent in December on a month-to-month basis.  Compared with December of 2011, retail sales sank by 4.7 percent.   Destatis also reported  that Germany’s adjusted unemployment rate remained unchanged at 5.3 percent in December. On the other hand, the news about the German economy has not been entirely gloomy.  The Ifo Institute reported that its  Business Climate Index for German Industry  jumped to 104.2 in January from December’s 102.4.  Beyond that, German investor sentiment took an enormous jump as the  ZEW Indicator of Economic Sentiment increased by a whopping 24.6 points in January (from 6.9 in December) to reach 31.5 points, its highest level since May of 2010. On February 1, Markit Economics released its final Markit/BME Germany Manufacturing PMI for January , which climbed to just below the expansionary threshold of 50, reaching 49.8 from December’s 46.0. At this point, investors in German ETFs should be concerned about preserving the gains they have realized since early December.  As the chart (below) for the iShares MSCI Germany Index ETF (NYSEARCA:EWG) demonstrates, the Relative Strength Index for EWG is in the “overbought” range, at 71.32.  The February 1 jump to 26.09 followed a cup-and-handle formation.  Prior to the 1.48 percent surge on Friday, the RSI had been holding just below the “overbought” threshold of 70 (Chart courtesy of  Stockcharts.com ). Where German stock prices go from here might be more heavily influenced by euro strength than by the nation’s economic reports. Germany ETF Update: iShares MSCI  Germany  Index Fund ETF (NYSEARCA:EWG):  +1.48%,  This ETF is designed to track the performance of the MSCI Germany Index.  The MSCI Germany Index tracks German stock market performance as reflected by the performance of top companies and sectors in Germany including Siemens, Bayer, SAP, and Deutsche Bank.  Learn More About iShares ETFs MarketVectors  Germany  Small Cap ETF (NYSEARCA:GERJ):  +0.39%,  This ETF is designed to track the performance of the Market Vectors Germany Small-Cap Index.  Its holdings consist of 83 stocks from the industrials, financials, and consumer discretionary sectors. First Trust  Germany  AlphaDEXx ETF (NYSEARCA:FGM):  +2.13%,  This ETF is designed to track the performance of an equity index called the Defined Germany Index.  The AlpaDEX approach is to focus on the best stocks and avoid the worst and it limits its holdings to 40 stocks.  Its annual expense ratio is 0.8 percent. Vanguard MSCI  Europe  ETF (NYSEARCA:VGK):  +1.04%,  This ETF is designed to track the performance of the MSCI Europe Index.  The MSCI Europe Index tracks the Europe stock market performance as reflected by the performance of top companies and sectors in developed Europe including France, Germany, Greece, The United Kingdom, Sweden, Norway, and Italy. Bottom line:  After experiencing negative 0.4 percent GDP during the fourth quarter of 2012, Germany appears on the edge of falling into recession with a strengthening euro and a weakening yen threatening the nation’s export sales.    Sign up for Wall Street Sector Selector’s FREE Stock Market Timing Indicator!    Disclaimer: The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector’s Disclaimer , Terms of Service , and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.