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Economy in Brief

EMU Trade Surplus Grows as Flows Slow
by Robert Brusca December 18, 2007

It may seem curious that so many Europeans are complaining about the strength of the euro while Europe’s economic data are off peak but are not collapsing and as the Euro Area trade surplus is still growing in October. Growing – the SURPLUS? Why is Gernot Nerb of Germany’s prestigious IFO saying that if the euro moves much higher, the ECB might even consider cutting rates although Euro Area inflation would certainly not accommodate that (nor would the growth rates of money or credit for that matter)?

A closer look at the trade components shows what is going on. Exports are still growing and growing faster than imports (8.6% Versus 6%, Yr/Yr for both). But one year ago export growth was 14.3% (y/y) and one year ago import growth was 12.6% (Y/Y). So both flows have slowed dramatically as the Euro has risen.

Over the recent three months imports are up at just less than a 6% pace but with food and drink imports running at nearly a 25% annual pace.

Overall exports are still growing as well, but if we look at the all–important manufacturing category we see that manufacturing exports have slipped from a pace of 15% one year ago to a Yr/Yr pace of 5.3% in November of 2007 and to a three month annualized pace of 4.2% over three months. This is a marked slowdown. For imports of manufacturing products the slippage is even more awesome. Imports of manufacturing goods were up by 14.4% Y/Y in Nov of 2006. In Nov of 2007 that Yr/Yr growth rate is down to +1.6% and over three months that rate is at a -10% pace.

The trade surplus continues to grow because the Zone’s imports are falling faster than export growth, but both flows are receding rapidly. The strong euro is impacting Euro Area exports and the weakness in exports sending shivers through the economy and slowing everything down impacting imports as well. It is no wonder that the OECD is urging the ECB to be tolerant of its inflation overshoot. Even so the policy endorsed by Nerb is an outliner.

These trade-offs are merely a sample of the sort of stuff Europe can expect if it wishes to pursue for the Euro a role as major reserve currency unit. Often what the FX market demands is a result that is not copasetic with the needs the domestic economy. Welcome to globalization.

Euro Area 13-Trade trends for goods
  m/m% % Saar
  Oct-07 Sep-07 3-Mo 6-Mo 12-Mo 12-Mo Ago
Balance* €€ 4,017 €€ 3,648 €€ 3,931 €€ 3,692 €€ 3,251 €€ (1,655)
All Exports 2.3% -1.2% 15.3% 13.1% 8.6% 14.3%
Food and Drinks 0.2% -1.8% 3.4% 11.0% 7.6% 15.0%
Raw materials 1.3% 0.6% 1.5% 6.3% 6.8% 19.7%
Manufacturing -0.4% -1.6% 4.2% 7.6% 5.3% 15.0%
All Imports 2.0% -0.9% 5.9% 11.2% 6.0% 12.6%
Food and Drinks -3.7% 8.8% 24.6% 18.1% 11.4% 8.7%
Raw materials -0.5% -5.0% -16.5% -0.4% -4.1% 35.7%
Manufacturing -1.7% -2.0% -10.0% 4.3% 1.6% 14.6%
*Eur mlns; mo or period average
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