EMU Deficit Lingers But Narrows As Imports Slow Sharply

The trade deficit for the European Monetary Union (EMU) in November contracted sharply to €15.2 billion from €28.1 billion in October. Over three months the deficit averages €26.6 billion, over six months €33.0 billion, over 12 months the deficit is €26.5 billion. One year ago, the monthly trade balance was in surplus for the 12-month average with a surplus on the order of nearly €12.7 billion.

What went wrong…(what’s going wrong) There are two prongs in this fork in the road as it takes the European Monetary Union from being in surplus on balance in 2021 to being in significant deficit today. The first item, and the one of lesser importance, is the balance on manufacturing trade. In November, this is in surplus with manufacturing trade logging a premium of exports over imports of €31.1 billion; that's sharply higher than the October surplus of €23.8 billion. Over three months, the surplus averages €26.7 billion, over six months it's €22.3 billion, and over 12 months it's €22.2 billion. One year ago, the 12-month average of monthly surpluses was €30.2 billion. There's been a steady slippage in the surplus for manufacturing trade since that; it has just started to reverse as the surplus in manufacturing is back up this month.

The second prong of deterioration is the balance on nonmanufacturing trade, and this is where the deterioration has been the most dramatic; it is mostly because of the rise in commodity prices. But with commodity prices now softening, we see a reversal in the deterioration here as well. Nonmanufacturing trade is in deficit in November to the tune of €46.4 billion; that's lower than October's €51.9 billion deficit. Over three months the nonmanufacturers deficit is at €53.3 billion; that's down slightly from €55.3 billion over six months but up from a deficit of €48.7 billion over 12 months. One year ago, the 12-month average of the monthly deficit was at €17.5 billion. Nonmanufacturing trade has chronically been in deficit in the EMU, but the deficit, traditionally, has been offset by the surplus in manufacturing trade. Over the last year, there has been some further deterioration that is now in flux, but the big shift is in the average for 2022 compared to 2021. The deficit in nonmanufacturing trade has ballooned sharply over the last 12 months as the surplus in manufacturing trade has withered and this has caused the widening gap in the balance of trade by the European Monetary Union. But recent data show how a reversal of that trend is in progress.

Trends in percentage terms… These values in euros have corresponding percentage trends. Looking at the percentage trends we can see that the worm is starting to turn because of growing import weakness as exports do a better job of holding their own…

For manufacturing exports, the year-on-year gain is nearly 16%. Over six months it's at an annualized game of 11%; over three months that gain is holding around the 11% pace. The pace of exports in manufacturing is slipping, but only slightly. For nonmanufacturing exports, the pace over 12 months is 22.4%. Over six months that sags to a decline at a 5% pace, but then, over three months, the pace is at steadies at -4% annualized.

EMU imports show manufacturing imports up 14% over 12 months. For six months imports fall at a pace of 1.5%, but then, over three months, imports fall at an 18% annual rate. Nonmanufacturing trade shows imports up 36% over 12 months. Over six months this reverses to log a decline at a 6% annualized rate, then, that pace decelerates sharply to a -48% annualized rate over three months. This is for imports into the European Monetary Union area from outside countries and includes a good deal of energy imports where prices are falling.

Trade flows in the European Monetary Union are slowing down and they're slowing down dramatically. They're slowing slightly for manufacturing exports, more for nonmanufacturing exports, they're slowing significantly for manufacturing imports and they're slowing dramatically for nonmanufacturing imports where commodity prices particularly for energy have broken.

EMU Members and Other Europe Turning attention to individual countries we see some slightly different patterns in German exports that have held up more steadily rising 14% over 12 months, gain to a 21% pace over six months, then settle back to a 15.5% pace over three months. This compares to German imports where the gains are nearly 30% over 12 months, accelerate to 33.5% over six months, and then decelerate sharply to about 6% over three months.

France shows some similar trends with exports up 16% over 12-months slowing to an 11% pace over 6-months and then falling at a 9% annual rate over 3-months. Imports also show deceleration, rising 19% over 12-months, gaining at a 10% pace over 6-months, then falling sharply at a 20% annual rate over 3-months.

The United Kingdom, a European country outside of the European Union, shows its exports up 29% over 12 months, slowing slightly to a 25% pace over six months then falling at a 13% annual rate over three months. U.K. imports follow the same trajectory only slightly magnified with the 22% gain over 12 months, a 7% annual rate fall over six months and a sizable 27% annual rate fall over three months.

In all cases, we see imports are slowing down. Imports are contracting over three months in France and the U.K. but just crawling at a slower pace in Germany. German imports grow on all horizons, and they decelerate over six months; they're relatively flat over 12 months whereas, in France and in the U.K., exports clearly decelerate and then decline sharply over the recent three-month period.

In other Europe- Finland and Portugal, show export flows rising over 12 months, decelerating and declining at about a 15% annual rate over six months. Portugal shows a 10.6% annual rate drop over three months. Finland shows a 23.3% annual rate drop over three months. Weakening trends are everywhere.

Clear weakening trends…crystal The data are clear and indicative of a broad economic slowing. Both exports and imports have been pulled under the spell of deceleration. Exports are somewhat more diffused because they go to different countries, and they spread to areas according to different weights and trade patterns across the countries. Export performance can be fairly varied for this reason. Still, we see a great deal of consistency in the patterns with only Germany showing some export resilience. On the import side, of course, imports are tied very strongly to domestic GDP growth. We see sharply weaker negative numbers in France and in the U.K. suggesting that domestic demand has declined abruptly. In Germany, while imports grow at a 6% (nominal) growth rate, that is much weaker than the 30% posted over three and six months so that the trend also indicates a substantial slowdown and domestic demand weakness, but perhaps not the same degree of weakness that we see in France and in the U.K.

In the European Monetary Union overall, we can gauge domestic demand a little bit better by looking at manufacturing trends since the price element will have a slightly lesser weight in those flows than in nonmanufacturing flows where commodities are involved. There, we see a reduction in the growth rate of imports from about 14% over 12 months, to a drop at an 18% annualized rate over three months; we see a decline of 3.1% in the month of November compared to a rise of 0.1% in October. Slowing domestic demand is evident (mixed in with weakening prices) for the European Monetary Union where the demand slowdown for the union as a whole is like the experience of France. Demand is weakening, and we can see that in the PMI surveys that have shown encroaching weakness and both the goods and services sectors. Note that EMU and member import and export statistics are different. EMU trade is only for trade between EMU members vs. non-EMU members- that nets out intra-union trade among members that national statistics include as ‘exports’ and as ‘imports.’ This data quirk could understate the weakness in EMU domestic demand, since developed economies seem to be weakening faster than developing economies.

Monetary policy lurks… Wild expectations for economic results- Current attention is focused on monetary policy both in Europe and in the U.S. where recently some inflation or inflation expectations data have broken slightly lower. What we see is an exaggerated market reaction to these indications of inflation no longer accelerating. But both in the European Monetary Union, and in the U.S., inflation continues to run at a pace that's far above what has been targeted and the current inflation news, while showing some break in trend, would take a wild imagination to see the current slowdown and drop in the inflation rate as consistent with achieving the monetary targets in either of these areas anytime soon.

Desperados: you better come to your senses… The market reactions to me indicate a desperation on the part of traders and markets to see the carnage end. The year 2022 inflicted losses across all asset classes giving investors nowhere to hide: bonds didn't work, stocks didn't work, gold didn't work, and the relatively new asset class, cryptocurrency, proved toxic toward the end of the year. Investors desperately want some relief from this, and they think the relief will come from central banks halting their tightening process. But unless central banks can achieve their inflation objectives, halting the tightening process early is going to do no one any favors. It may allow markets to have some sort of relief rally, but that would be short-lived and not well-celebrated as the revival of inflation would quickly put those same central banks bank on a new tightening program that would hammer markets anew.

Central banks must be true to their targets- Monetary policy cannot be decoupled from the trends in the economy and especially not from the targets to which the central banks have committed themselves. The millennials and others trading in markets today are a different breed from what the economist Ed Yardini used to call ‘bond market vigilantes’ in the 1980s. The argument of today turns vigilantism on its head; in 1980s it didn't matter what the Fed did because the bond market was going to ride shotgun over the economy and would provide tightening by raising interest rates and smashing bond prices even if the central bank didn't act. That was then. This is now. It now seems that even in the face of the central bank raising rates to address inflation that is howling, at the door and a clear existential risk, the bond market wants to believe in the fantasy of inflation falling on its own, snuggling up to its target, tucking itself into bed, and of everyone living happily ever after. It should be clear that this is a desire much more than it's a forecast that might be justified by anything we know about markets or that we've seen in the past.

A voice in the wilderness… For now, in the U.S., Jim Bullard, President of the St. Louis Federal Reserve Bank, is the lone voice urging the Fed to get rates higher, to get them up where they need to be, and to do it quickly. Other vocal FOMC members are urging the Fed to tap on the brakes more gently even as inflation continues to race at an excessive speed, albeit a speed that is off-peak. It appears that bond market optimism is worming its way into the Fed’s psyche as several FOMC members have suggested that another stepping down in the pace of tightening is warranted. Is it? On what planet? The Fed may be in the process of diverting itself from its appointed route. If that happens, it's a dangerous path to walk and it will also tend to lead other global central banks astray…DANGER! Global DANGER!