German and French Trade Stumble

July 9, 2008

The seasonally adjusted German trade surplus narrowed 18% in May but averaged EUR 16.2 billion in April-May, similar to EUR 15.9 billion per month in 1Q08.  The disconcerting aspect of these data is the weakness in exports, which fell 3.2% m/m.  That was the third drop in four months.  Exports expanded 10.3% per annum over the three years to 2006 and by 8.5% last year.  Their on-year advance in January-May of 2008 amounted to 6.7%, but May’s exports were just 2.5% greater than the level in May 2007.  Members of Euroland trade most heavily with one another, which makes sense since their shared currency minimizes the costs and risks of doing a commercial transaction.  Germany’s exports to other members of the bloc recorded on-year growth of just 0.5%, less than the 4.2% rise in German exports to countries not even in the EU.  The weakness of Germany’s neighboring markets, not the strength of the euro, seems to be primarily responsible for softening exports.  Three of the Bloc’s four largest economies — Spain, Italy and France — have significantly darker economic growth prospects.  If Germany too stumbles badly in the second half of this year,  a disproportional drag on all of Euroland is likely to result.

The French trade figures for May also tell a story of weakness but with a different central theme. French industry was not as diligent as their German counterparts at holding down labor and other costs from the mid-1990’s onward.  German competitiveness improved against its European Monetary Union (EMU) partners, including France.  The near-balance of the Euroland current account disguises vastly different individual trade performances.  Germany runs a current account surplus equivalent to about 6% of GDP.  Among the Ezone’s other three largest economies, the current account is in deficit to the tune of about 9% of GDP in Spain, 2.5% of GDP in Italy, and slightly more than 1.5% of GDP in France.  All three of these other economies have felt the pinch from the appreciating euro far more acutely than has Germany.  The French trade deficit in May was 25% wider than in April.  What makes that increase all the more surprising and worrisome is that the energy deficit actually shrunk by 7.6%.  It is France’s trade in industrial goods that is worsening, and that spells trouble for economic growth looking ahead.



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