EMU Trade Surplus Erodes

The European Monetary Union trade surplus moved lower in July. At €15.46 billion, it is down from €17.02 billion in June. The erosion was due to a larger deficit on nonmanufacturing trade as the manufacturing balance actually improved to €39.1 billion from €37.9 billion. However, on nonmanufacturing trade, the deficit swung to -€23.7 billion from -€20.9 billion.

The chart provides the hint that the move back to surplus may have passed its peak as there is a string of surpluses having swept up to higher levels and now engaged in the process of headed for lower levels.

The trend for exports shows overall exports slowing then declining steadily from a growth rate of 2.5% over 12 months to 0.6% over six months to -8.1% over three months. This transition is driven by the growth rates of manufacturing as well as nonmanufacturing exports; both of which transition from positive growth rates over 12 months to negative growth rates over three months.

On the import side, the patterns are inconsistent although they culminate in weakness over three months. Total imports fall 2.5% year-over-year, advance at an 11.4% annual rate over six months, and then decline at a 3.2% annual rate over three months. Manufacturing imports follow this same progression; however, for nonmanufacturers, growth is at 3.2% over 12 months, that expands to a 15% annual rate over six months, and then collapses to -3.4% over three months. Import trends are chaotic.

Turning to three European countries two of them the largest countries in the European Monetary Union, we find Germany has exports declining progressively and imports doing the same. Both German export and import flows are slowing consistently and declining with imports falling faster than exports. For France, exports are accelerating from 4.3% over 12 months to 5.3% at an annual rate over six months to nearly 12% at an annual rate over three months. French imports, in contrast, don't have a clear trend but they are declining on each of those horizons. The U.K. shows declines in exports and imports year-over-year that are relatively balanced and again declines over six months that are relatively balanced for the two flows. But over three months, U.K. exports advance at an 11.3% annual rate while imports are basically unchanged at a 0.1% annual rate.

Export trends for Finland, Portugal, and Belgium find cross trends, with Finland showing a decline in exports of 17.3% at an annual rate over three months. But Portugal shows exports accelerating from 12-months, to six-months, to three-months, culminating in a 45.9% annual rate pace over three months. Belgium shows an export decline over 12 months that gives way to increases over three months and six months but again without a clear trend.

The trends for the three-month growth rates are positive for the EMU aggregates and for the exports of Finland, Portugal, and Belgium. But trends are negative for exports as well as imports for Germany France and the U.K. Over 12 months, most of the calculations show declines in trade flows, underpinning again the notion that manufacturing has been weak in Europe. That weakness lends itself to weakness in both the exports and imports; European weakness in manufacturing naturally leads to knock-on weakness in trade. That is not surprising. It has been the strength in the services sector that has tended to keep growth alive, especially in Europe.

Rate cuts by central banks are back in the picture despite somewhat mixed inflation news. This week the Federal Reserve is expected to join the rate cut club even though U.S. economic data are hardly as weak as in other countries. The Fed in the U.S. is preparing to cut rates in the quest to pull a rabbit out of its hat and create a soft landing. It's an interesting choice for the Federal Reserve to cut rates when economic conditions are not greatly calling for it and with inflation still over target for 40-plus months running. And gutsy to do it with a presidential election coming up in November. The Fed rate cut is sure to be controversial although with some people calling for rate cuts as large as 50 basis points and even 75 basis points, it seems one of the strategies is for the Fed to deliver a smaller rate reduction and to have that masquerade as temperance. The calls and forecasts of large cuts may take the attention away from the fact that the Fed actually is going to cut rates going into the election under marginally accommodating conditions.