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Economy in Brief

German Trade Surplus Shrinks in December But Stays Larger Year-Over-Year
by Robert Brusca  February 9, 2016

German trade flows continue to show deterioration sequentially as growth rates are fading but year-over-year exports and imports still post gains as the year-over-year German surplus has expanded.

German exports show a sequential slowing in growth as exports are up by 0.5% over 12 months, falling at a -5.7% pace over six months and deepening to a -8.9% pace of contraction over three months.

On Germany's import side, imports are up by 2.1% over 12 months, falling at a -1.3% pace over six months and falling faster at a -10% pace over three months.

Export and import detail of flows lag by one month (their growth rates are shaded in the table and a timing wise mismatched with the aggregate flows). The patterns for the commodity composition of German exports are less clear than for the overall flows given their mismatched timing, especially with consumer goods exports holding up. But capital goods, the traditional strength of German exports, are showing a flow reduction over three months and over six months on data up-to-date through November.

Despite the overall import reduction over three months, the import categories in the table each show solid to strong import growth over three months (ended November) and growth over all periods. Of course, German domestic demand has been holding up relatively well.

The ratio of exports to imports generally has slipped from 12 months ago to December. Over this time frame, German real export orders are contracting as they are lower by 4% over 12 months, although orders have rallied to rise at a 13.6% annual pace over the last three months. Real export orders are up in each of the last three months.

Despite erosion in the trade flows sequentially and in year-over-year orders, the recent strength in real export orders is reassuring. Orders tend to be a good barometer of Germany's exports over the coming months. Still, globally the trade picture is weakening. The latest OECD LEIs painted a picture of stability using its leading economic indicators. But there was still some minor erosion in Germany and that report was based on data only through December.

The wealth effect

As 2016 unfolds, the economic news has been decided worse worldwide than anyone imagined. The oil market has collapsed and so have equity markets creating a gigantic loss in wealth worldwide. In most economic models, wealth matters to consumption. The most recent tangible sign of spending trouble was the disappointment at the high-end art auctions in London where multimillion dollar paintings sold for large amount less than their last sales- in some cases 30% lower or more. In other cases, the sellers' reservation prices were not met. As a result, a large proportion of works were then pulled from the auction. Weak art auctions may not send shivers up your spine, but they are only the most recent tangible example of what the losses in wealth can do. High-end monies from oligarchs in Russia, to OPEC sheiks, to the Chinese nouveau riche, have been either lost or tied up as wealth losses occur and as special factors tie up their monies. In addition, market losses of equity wealth can breed further losses of equity wealth as a vicious circle of selling sets in- and so far that scenario has developed in 2016.

Central banks see...

While the Federal Reserve in the U.S. appears to be trying to hold its view, Mario Draghi of the European Central Bank spoke of it not being a good time to be watching from the sidelines since it is time to act. The Bank of Japan has contentiously shifted to adopt a policy of negative interest rates. The U.K. has lost its lone policy dissent and is no longer poised to hike rates. Even the NIESR has cut back its forecast for the U.K. Forecast trimming has been the rule of thumb for years now as this recovery has continued to disappoint. It is still seems to be nothing less than the law of the land.

In short, policymakers are either marking time or acting to provide stimulus or preparing to provide stimulus except in the U.S. where the central bank's posture is equivocal. In China, economic data have been weak and official data show huge losses of official reserves in November and December as outflows have surged as China has tried to stem downward pressure on the yuan.

Global growth

Traditionally trade flows expand faster than GDP internationally and are an engine of world growth. But trade has been slowing down and with the global manufacturing sector in such a state of surplus, trade growth is still geared to remain on the weak side. All of this stems from too much supply coupled with demand weakness which is holding back manufacturing output. Since that sector is the high productivity sector, countries are left to develop growth through their service sectors where productivity is lower and the impact on GDP growth will be lower. And that is how global growth is unfolding and why it is slowing. Even so there are signs of weakening growth in the service sector itself. The sharp drop in the U.S. ISM nonmanufacturing index in January is a prime example.

In this environment, the global surplus and the domestic economic sectors are fitting together in a way that is retarding growth. There is pressure to reduce exchange rate values for competiveness reasons, but that is a zero-sum game. Exchange rate manipulation does not increase global growth; it just rearranges the deck chairs on the Titanic. Countries have pledged not to rely on this mechanism, but foreign exchange manipulation clearly still is in play.

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