Germany: Helping Hand From An Old Friend

December trade data shows that there are still signs of life in the eurozone’s largest economy.

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A more than welcome sign of life. German exports (seasonally and calendar adjusted) increased by 1.5% month-on-month in December, from 0.3% MoM in November. Imports increased by 1.2% MoM, from -1.3% MoM in November. As a result, the trade balance widened to €19.4 billion in December from €18.9 billion in November. Not adjusted for seasonal and calendar effects, exports in 2018 were some 3% higher than in 2017. Interestingly, despite all trade war fears, the export sector didn't just grow in 2018 but probably contributed positively to the economy’s fourth quarter GDP growth.

What's going on in the export sector?

The German export sector was on a rollercoaster ride through all of 2018, with problems in emerging markets, trade tensions between the US and China, US protectionism, a possible cooling of the Chinese economy and increasing fears of a hard Brexit. There simply seem to be too many crises in global trade for the German export sector to defy all of them. Another factor, currently underestimated, is the exchange rate. Even though the euro remains relatively weak vis-à-vis the US dollar, Germany’s real effective exchange rate has appreciated significantly since the start of 2017 on the back of falling emerging market currencies. The currency tailwind German exporters experienced between 2015 and early 2017 has turned into a headwind. Today’s data, however, shows that it is too early to give up on the German export sector.

Interestingly, when looking at the available bilateral trade data, some current assumptions are confirmed while others are actually rebutted. Despite all talk about a Chinese slowdown, the share of German exports going to China actually increased in the last few months of the year, to higher levels than the 2017 average. At the same time, despite trade war fears, the US remained the most important export destination in 2018. On the other hand, however, and not really surprising, Brexit uncertainty has left clear marks on the German export sector. While exports to the UK accounted for almost 8% of all German exports in 2015, this share has come down to 6%. If this trend continues, it would not take long before the UK has dropped out of the Top 5 of Germany’s most important export partners.

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