EMU Trade Surplus Expands

The surplus on the international trade account of the European Monetary Union rose to 17.5 billion euros after logging €12.4 billion in May. The July reading keeps the surplus roughly in the range that we've seen this year with the three-month average at €16.1 billion, a six-month average at €18.1 billion and a 12-month average at €14.4 billion. The improvement month-to-month stems from a week May.

Better surplus; worse news All improvements in the trade surplus are generally regarded as good events because they contribute positively to GDP growth; an improved surplus may indicate ongoing competitiveness for the reporting country or unit. But reality is always more complicated than that. Exports in the monetary union fell by .2% in June after falling by 2.8% in May. Imports in the Monetary Union are down by 2.4% in June after falling by 0.4% in May. The European Monetary Union is shrinking itself to a larger surplus and that certainly tempers the good news. The improvement in the surplus is coming about more because of weakness in imports than strength in exports.

Strength through nonmanufacturing? Beyond that, we can also break the balance down into a surplus on the manufacturing trade account versus a deficit on the non-manufacturing account. zin June the manufacturing surplus rose to €39 billion from €38.8 billion in May, a small improvement the manufacturing balance when compared favorably to earlier periods in the year. The balance on non-manufacturing trade came in at a deficit of €21.5 billion compared to €26.3 billion in May. It’s the deficit on non-manufacturing trade that fell and contributed the most to the improvement in the overall trade balance. The non-manufacturing average monthly balance is slightly smaller than it had been earlier in the year.

Weak imports may reflect weak growth Weak imports raised the question of the adequacy of domestic growth and, of course, weakening imports for non-manufacturing products (in the last two months) looks more to the future since these are the raw material for goods and future periods. For these reasons the improvement in the trade surplus in June may not be the good news that it seems to be in its headline.

There's also a good deal of volatility to deal with in these numbers looking at exports manufacturing exports fell by -1.5% in June and by -1.2% in May and they have for the most part negative growth rates over 12-months and 3-months with a small positive growth rate over 6-months. Non-manufacturing shows a sharp increase in exports in June, up 6.4%, but that's in the wake of a 10% month-to-month decline in May. Non-manufacturing exports have been steadily increasing and holding to relatively strong growth parameters rising 11%, over 12-months, at a 4.8% pace over 6-months, and at a 9.2% annual rate over 3-months.

On the import side imports are falling over all horizons by relatively consistent numbers ranging from a -4.8% decline year over year to a -1.6% annual rate decline over 6-months. The recent 3-months produce a decline of 3.6% at an annual rate for total imports. Manufacturing imports into the Monetary Union show negative growth on all horizons and there's no sign of that letting up. For non-manufacturing goods the trends go the other way and there's actually acceleration; non-manufactured imports fall by 1.4% over 12-months, rise at a 4.9% annual rate over 6-months and then rise at an 8.1% annual rate over 3-months. Of course, that pattern squares so much better with the pattern of non-manufactured exports, leading to suspicions this is mostly a price effect and not a volume effect.

Germany and France and beyond Looking at countries in the Monetary Union we highlight Germany and France and find that both in June have declines in exports and in imports with relatively larger declines in June imports. Both are coming off a May where exports and imports increased and where exports were stronger than imports. Sequentially Germany shows negative growth for exports and imports on all horizons with relatively deeper declines in imports. France shows consistently rising exports - even accelerating exports- while imports decline consistently over 12-months, 6-months, and 3-months.

Separately the UK reports declines in exports and imports in both June and May and its progression from 12-months to 6-months to 3-months shows sharp export and import declines over 12-months and over 6-months followed by strong exports over 3-months and essentially flat imports over 3- months.

Elsewhere in the monetary union we look at exports and find unclear trends… Finland, Portugal, and Belgium essentially seem to go their own ways with Belgium showing consistently weak and declining exports. Finland shows a tendency toward weakness interrupted by a strong 40% annual rate rise in exports over the last three months! Portugal also shows steady but slow export growth until the recent three months where there's an increase of 11% at an annual rate.

Summing up These trends for the Monetary Union portray inconsistency more than some kind of new trend developing. However, this occurred tendency to witness on the import side with the exception of non-manufactured goods whose trend is a bit of an enigma. Separate trends from both Germany and France show weak imports. Macroeconomic data have generally been moderate to weak in EMU. It's reasonable, after looking at these statistics to begin to question growth even though this is a report that generates a stronger trade surplus that tends to contribute positively to GDP growth! When growth is being boosted in the face of declining exports by even weaker imports, it's not generally a good sign. This is simply one of the automatic stabilizers in the economy that tends to soften the blow on GDP when the economy weakens. It's too soon to tell whether this is going to develop into some broader weakness or not. But Europe has been on a bit of the razor's edge recently and while the ECB did turn the corner and start to raise rates it did that once and there's been a long hold ever since. The outlook remains unclear both for growth and for monetary policy while the geopolitical environment has continued to deteriorate and the war on Europe's doorstep is as contentious as ever. If there is some clear good news for Europe, it's that perhaps the US July employment report appears to have been misstated and the data have that have been released in the wake of that report had been considerably stronger. This gives Europe some hope for sustaining an important source of export demand for their products. However, growth in the US is not certain either and there are question marks raised about its sustainability as the Federal Reserve grapples with the question of whether to cut rates in September or not. For the US, as well as in Europe - and we can include Japan in this as well, all bets on the future are off and data dependency has stepped to the fore.