Monday, April 9, 2012

German exports defy February freeze

A reliable friend. German exports defied the general February freeze of the economy and increased for the second consecuetive months. As just reported by the Federal Statistical Office, German exports increased by 1.6% MoM, from 3.4% MoM in January. At the same time, imports increased by 3.9% MoM, narrowing the seasonally-adjusted trade balance to 13.6 bn euro, from 15.1 bn in January.

Last week’s industrial data showed that the German economy is still flirting with a technical recession. However, a weather-driven sharp rebound of the construction sector, moderate production and today’s trade data still have the potential to lift the economy into recession-free territory.

More and more, the German economy’s destiny is in the hands of its trading partners outside the Eurozone. Detailed data for 2011 trade last week showed that the Eurozone crisis is getting closer and closer to the heart of the German economy. In Q4 2011, exports to the biggest Eurozone trading partner, France, still increased by 8.9% QoQ, while exports to the Netherlands were only up by 2.3% and exports to Italy even dropped sharply (-7% QoQ). The main drivers of Germany’s export engine are currently non-Eurozone countries: the US, the UK and China.

Germany’s dependence on international – and therefore less intra-Eurozone trade – will not make the necessary rebalancing of the Eurozone economy any easier. Even if there has been a tender catching up in terms of price competitiveness by Eurozone peripheral countries vis-√†-vis Germany since early 2010, a continuation of this trend will not be easy. The peripheral part of this rebalancing is already a painful one. However, ideally, the rebalancing also requires a German part but German exporters look unlikely to play this role. Since early 2010, German companies have already started to squeeze their margins more than other Eurozone countries, helping to sustain market shares. Obviously, German companies cannot squeeze margins forever. As a consequence, the tolerance for and acceptance of higher wages in the non-tradable sector (as e.g. illustrated by the recent 6.3% raise in the public sector) should remain much higher than in the tradable sector. Eurozone rebalancing will remain a very bumpy road.

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