German exports surge in July

The reliable friend. July trade data just showed that the export sector remains an important growth driver of the German economy and has added to evidence of a solid start to the third quarter. Exports increased by 2.4% MoM, from -1.1% in June. As imports increased by 2.2% MoM, the seasonally-adjusted trade balance improved to 22.8 bn euro, from 22.1 in June. While many German commentators still complain about the ECB’s QE programme, German exporters should send a thank-you letter to Mario Draghi. Notwithstanding the excellent quality and product specialization of German exporters, the weak euro has clearly been a very special stimulus package; actually for the entire German economy. While industrial production is still struggling to gain momentum, exports have increased by more than 17% since the start of the year. In the same period, the effective nominal exchange rate of the euro has depreciated by around 4%. A closer look at German exports shows that exports to some countries are more sensitive to exchange rate movements than others. Interestingly, German exporters are normally amongst the main European beneficiaries from a weaker currency. Interestingly, German exports to the US seem to be most sensitive exchange rate changes. An important driver behind the fact that in the first half of the year, the US has become the single most important German trading partner; taking over this number one position from France. As regards the other currently often discussed German trading partners, a comparison of export and exchange rate developments shows that exports to both China and other emerging markets are less correlated. Looking ahead, this link between exports to different destinations and exchange rate movements is both good and bad news for the German economy. It shows that a weak exchange rate might compensate for domestically-driven problems in emerging economies, while at the same time it should further boost exports to the US. All in all, the weaker euro seems to have off-set domestically-driven weaker demand in several emerging economies. If and when the Fed finally starts hiking interest rates and the anticipated further weakening of the euro actually materializes, German exporters should not only send a thank-you letter to Mario Draghi but also to Janet Yellen.