Euro Area Trade Surplus Surges Higher through the Backdoor

The European Monetary Union has logged its 4th trade surplus in a row and the 5th surplus in the last six months. This follows a long stretch of deficits that arose in the early post-COVID period.

The surplus: The surplus in August has moved up to €11.9 billion from €3.5 billion in July. The 12-month average is still at a deficit of €7.8 billion. The current account surplus/deficit situation is chronically a balancing act between a manufacturing surplus and the deficit logged on the nonmanufacturing account. In August, the manufacturing trade balance among monetary union members moved up to €34.9 billion from €29.9 billion in July. That compares to a deficit of €23 billion in August versus €26.4 billion in July for the nonmanufacturing trade balance. The larger surplus in manufacturing, of course, causes the overall trade balance to be positive.

Month-to-month: Exports in the monetary union rose by 1.6% in August after falling by 1.7% month-to-month in July; imports fell by 2% in August after rising by 0.1% in July.

Sequential trends: Sequentially export growth in the monetary union is still negative but at more or less steady negative paces running at -3.8% over 12 months, at a -4% pace over six months and at a -3.6% pace over three months. Imports also show consistent and essentially trendless negative growth rates, but they are much weaker growth rates (larger negative growth rates) that coalesced around declines of 20% at an annual rate or a little bit more.

Sequential manufacturing trends: Focusing on manufacturing doesn't change the trends very much. Manufacturing exports over 12 months to six months to three months show all-negative growth rates in a range of -1.8% to -4.0% annualized. Similarly, manufacturing imports show consistent and much larger negative growth rates of -12.8% over 12 months, of -9.7% annualized over six months and of -20.2% at an annual rate over three months. Germany's trade performance is not being achieved on the back of strong exports; rather it's been done on the back of continuing weakness in exports with even weaker conditions in imports.

Sequential nonmanufacturing trends: However, trade performance is a result of manufacturing and nonmanufacturing trends. Nonmanufacturing trends for exports also show consistent negative results for slightly higher negative growth rates in the range between -4.3% and -11.7% over three months, six months and 12 months- again without a clear pattern. For imports, the nonmanufacturing trends show still-gigantic negative numbers, but in this case, they are tending towards slightly less weakness with -41.9% growth over 12 months, -25.3% growth annualized over six months, and -20.9% over 3 months annualized. Comparing nonmanufacturing trends, we basically get the same result as for trade in manufactures. Nonmanufactured exports are weak, but nonmanufactured imports are even weaker and that also tends to drive the trade picture more toward surplus. Clearly, it's demand weakness in the monetary union plus price weakness on the commodity price front that are helping to cause the trade picture to improve in the monetary union.

Germany: The German trade is slightly different from the EMU trend with exports logging positive growth on all these horizons, although showing weakening growth with a 7.6% gain over 12 months, a 1.7% annual rate gain over six months, and only a 0.8% annual rate gain over three months. Compared to the European Monetary Union trends, Germany also has imports weaker than exports, with imports rising 3.8% over 12 months, falling at a 19.4% annual rate over six months and then falling at a 13.1% annual rate over three months.

France: France shows some similarity to the German situation with the growing exports although in the case of France exports are accelerating from 4.3% over 12 months to a pace of 5.3% annualized over six months, to an 11.9% annual rate over three months. French imports are also declining on all these horizons although with a much weaker negative growth rate over three months as French import growth transitions from -9.2% over 12 months to -19.9% annualized over six months to an annual rate of just -2% over three months.

United Kingdom: The U.K. that is completely independent and no longer a part of the European Union shows decaying trends for exports that grow by 24.2% over 12 months, decline at a 14.6% annual rate over six months and then decline at a 54.9% annual rate over three months. U.K. imports fall by 1.2% over 12 months, then fall at a 10.1% annual rate over six months, but then only fall at a 7.1% annual rate over three months. The weakness in exports over three months completely dominate the weakness in imports for the United Kingdom over that period.

Other Selected European exports: Export data for Finland, Portugal, and Belgium show very mixed trends: all of them share declining export trends over 12 months, but then over six months Finland posts an export gain of 1.3% while exports from Belgium and Portugal continue to show substantial negative growth rates over six months. Over three months Finland’s exports declined at a 27.8% annual rate as Portugal and Belgium each saw exports increasing over three months by 7.4% in Portugal and at a 5.3% annualized rate for Belgium.

Trade and economic trends; wrapping up: Trade trends for Europe are mostly negative although in some cases they are sluggish; France is the only exception on the table that shows consistent positive export growth and export growth that is accelerating. The European Central Bank continues to raise rates to fight inflation and of course the doorstep war in Ukraine continues to cast a dark shadow over Europe and now the new conflict in the Middle East offers another instability to worry about. Growth in Europe has been uneven while growth in the U.S. has slowed but continued positive. The U.S. job market has been surprisingly resilient and continues to kick up its heels, refusing to die in the face of higher interest rates and tighter Fed monetary policy. Economists in the U.S. no longer have a recession forecast as their baseline event although those who are not forecasting recessions are generally forecasting quite a slowdown in job growth and for economic growth. Wiping recession off the face of the forecast doesn't change the profile of the forecast all that much in most cases although it's being portrayed like that in the press.

A cycle apart: We continue to see growth rates globally weakening. While inflation has come to behave somewhat better, inflation is excessive with respect to the targets of all major central banks. What is different in this cycle is the conviction of central banks to put the toothpaste back in the tube after it gets squeezed out. In the 1980s, the Federal Reserve faced an extraordinary inflation rate after a long period of excessive inflation. What's different in the 2020s. Is that inflation has flared over target - and not as badly and not as it did in 1980- but it has done this after a period of inflation control and stability. This fact has caused central banks to think that they do not have to be as tough in fighting inflation because they think that it will by itself go back down to a more benign state. Policy is in the process of testing that hypothesis in the U.S. and in Europe. It's far from clear what happens if that hypothesis turns out to be wrong or if the decline in inflation simply looks like it's not going to return to the targeted mark anytime soon. In the meantime, policy has plenty of other things to distract it, including this new war front in the Middle East and ongoing war in Ukraine as well as still difficult global economic conditions and, not surprisingly, amid these kinds of difficult conditions we have political conflicts and instabilities cropping up as well. All that makes it more difficult to target policy to the problem at hand. We are in dangerous, treacherous, times for economic and geopolitical policymaking.