EMU Trade Deficit Continues to Expand

The trade deficit in the European monetary area fell to 47.3 billion euros in August from a 40.5 billion deficit in July. The surplus balance on manufacturing trade is reduced to €16.1 billion in August from €16.6 billion in July. Most of the deterioration in the trade balance came in nonmanufacturing trade, as the August balance on that account widened to €63.4 billion from €57 billion euros in July.

The European Monetary Union trade balance has been slipping at a very rapid rate. The 12-month average is -19.7 billion euros, over six months that expands to -€33.9 billion and over three months it's at -€40.3 billion. The three-month average is twice the 12-month average. The surplus balance on trade in manufacturing has slipped steadily but more modestly from a €22.3 billion surplus over 12 months to an €18.8 billion surplus over six months and then to a €17.2 billion surplus over three months. These are period averages of the surpluses. On the same timeline, the nonmanufacturing balances have gone from a €42 billion deficit over 12 months to a 52.7 billion deficit over six months to a €57.5 billion deficit over three months. Over the broader sequential period, just as over the last several months, the deterioration is mostly in nonmanufacturing trade pointing the finger at commodities and the increase in commodity prices and particularly the price of energy goods internationally.

Not surprisingly, this trend is built on a weakening trend in exports and a withering trend in imports as well, but with export growth rates much lower than import growth rates throughout. Export growth rates transition from a 21% annual rate over 12 months 2 a 19% annual rate over six months, to a 6% annual rate over three months. For imports, there's a 51% annual rate over 12 months that stabilizes at about 52% over six months and then slides to a 36% annual rate over three months. In both cases, the growth rates for exports and imports are declining; however, the import growth rates simply swamp and dwarf the growth rates for exports.

We can look at these growth rates separately for manufacturing and for nonmanufacturing trade and while the numbers are different the trends are not particularly different.

For manufacturing trade, export growth slows from 18% over 12 months to 10.5% over six months to 7% over three months. For imports, manufacturing growth rates log 29% over 12 months, 29% over six months and 15% over three months.

For nonmanufacturing trade, export growth rates log 37% over 12 months, 64% over six months and then drop sharply to 3.7% over three months. For imports, the 12-month growth rate is 110%, the six-month growth rate is 105%, and over three months that pace steps back to a growth rate of 81%. Nonmanufacturing trade is clearly seeing nominal flows expand much faster than manufacturing trade. The action is really on the import side where the growth rates are typically twice or more the growth rates on the export side for nonmanufacturing goods. It's clear from these statistics that inflation is what's really driving the deterioration of this trade account of the European Monetary Area.

Separate country level statistics for Germany and France tell the same story although with less of a gap between the export and import growth rates themselves. For Germany, exports expand at a 14% pace over 12 months, at a 21% pace over six months and fall back to a 15.5% pace over three months. For imports the growth rate is 29% over 12 months, 33.5% over six months and that over three months imports fall very sharply and leave their growth rate below that for exports at a 6.4% annual rate. For France, exports grow at a 20.9% annual rate over 12 months, at a 6.1% rate over six months and at a 15.3% rate over three months. For imports, the 12-month growth rate is 30.9%, over the six months the growth rate is 25.1%, and the three-month growth rate at 19.5% is only a few percentage points above the growth rate for exports.

Other European growth rates focus on exports. In the table, we have growth rates for Finland, Portugal, and Belgium. These export growth rates generally fall from about 30% over 12 months, down to a pace about 25% over six months. And then over three months, in Finland export growth declines at a 7.1% annual rate, in Portugal exports decline at a 16.1% annual rate and then Belgian exports expand at a 3.2% annual rate over three months. Export growth clearly slows in all three of these countries- exports decline over three months in two of them. We see evidence in these flows of weakening demand globally against the earlier EMU, French and German evidence of still strong nominal import demands.

For the U.K., a different picture emerges, with exports having a 27% growth rate over 12 months, a 58% growth rate over six months and a 24% growth rate over three months. U.K. imports grow at a 29% pace over 12 months, faster than exports, but then slip sharply with 10.7% annual rate over six months and then slip again for 1.1% growth rate over three months. These figures reflect the slowdown in the U.K. economy and the onset of recession. There is going to continue to be slowdown for demand in the U.K. market. There's also a sharp weakness in the pound sterling on the foreign exchange markets that will affect U.K. trade flows in the near term. However, with the possibility of a J curve effect operating in the short term, we might not see that in the next few months data, immediately, but further U.K. trade improvement should play out over the next six to 12 months.

The European situation shows how fundamentally importantly inflation can change the outlook on trade accounts. The importation of raw materials in the European Monetary Union has led to a sharp deterioration in the trade balances there. Nominal imports have accelerated very sharply on the back of rising inflation for energy, other commodities, and food. On the other hand, exports for manufacturers have performed well but are slowing and not able to stand up to the growth rates of nonmanufacturing goods which have begun to dominate trade. The European Monetary Area has seen inflation driven the trade deficit deeply into the negative territory.