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Economy in Brief

Euro Area Trade Stumbles Ahead
by Robert Brusca  July 16, 2014

Euro area exports rose in May by 0.6% as imports lagged slightly, rising by only 0.5%. As a result, the trade balance in the euro area saw a slightly larger surplus in May at ?15.29 billion.

Exports are not strong across the board. Raw material exports rose and `other' exports rose. If we partition exports by manufacturing and nonmanufacturing goods, we find that manufacturing exports rose by 0.9% in May after a 0.8% increase in April. However, manufacturing exports are only up at a 1% annual rate over three months and have decelerated from rates of growth above 4% that have prevailed over six months and 12 months. Exports of nonmanufacturing goods are falling. They fell by 0.9% in May and by 4.7% in April. They are declining at a 7.6% annual rate over three months and a 9.1% annual rate over six months. These growth rates compare with a 4.1% drop over 12 months. Clearly manufacturing exports are still increasing, but nonmanufacturing exports are engaged in an opposite path of steady erosion.

Imports rose by 0.5% in May after a 0.4% decline in April. Imports show some unsteadiness, falling by 1.5% at an annual rate over three months after having risen at a 3% rate over six months and at a 1.9% rate over 12 months. In May, imports for food and drinks and raw materials fell; only `other' imports increased. We partition imports into manufacturing and nonmanufacturing components as we did for exports. Here we find the opposite trend that we see for exports. There is substantial weakness in the manufacturing sector. Manufacturing imports fell by 2.7% in May and they are falling at a 9.6% annual rate over three months. That compares to gains of only 0.3% over six months and 2.4% over 12 months. Manufacturing imports are on a clear path of erosion. By comparison, nonmanufacturing imports are speeding up. Over three months they are advancing at a 14% annual rate compared to 7.7% over six months, which itself is up from 1.2% over 12 months.

The euro area is seeing some substantial shifts in the composition of its trade with the manufacturing and nonmanufacturing imports and exports.

Looking at some key countries, Germany is showing export and import weakness with both flows falling in May and both of them registering declines over three months as well as six months. German imports are particular weak, falling a 16.2% annual rate over three months. German exports are falling at a 1.5% rate over three months and that's worrisome enough.

However, France, which has become the chronically weak member in the euro area, shows rising exports and imports in May and positive three-month growth rates for imports that are particularly strong growing at an 8.7% annual rate. Over six months and 12 months, however, French imports are declining. The pick-up in imports over three months is especially curious since France is still struggling to grow.

The UK is not a member of the single currency arrangement. Its exports and imports fell sharply in May with imports falling over three months, six months and 12 months; they accelerate the pace of decline over the more recent period. This weakness in UK imports is surprising since the UK economy has continued to grow and prosper.

The Netherlands and Portugal show export declines in May and declines over three months, six months, and 12 months as well. Finland shows a decline in exports in May but posts solid increases over three months, six months and 12 months. Despite ongoing export growth in Finland, there is a slight tendency for export growth to slow.

Euro area data have been somewhat irregular recently with an industrial production falling across the zone and with the weakness in current activity measures and confidence measures ranging from the Markit sector indices on manufacturing and services to local country gauges. In Germany, the well-respected Ifo gauge has fallen and the ZEW expectation index has continued to fall even this month.

When the strong and resilient country of the euro area begins to show some unevenness, it is time to take a step back to try to gauge what's going on. Weaknesses in German export orders and industrial production and, as we see in the table, export and import flows, are not the sign of the healthy German economy that we expect to see. Overall, Germany continues to do much better than its fellow members of the European Monetary Union. If Germany were really getting weak, we would expect to see considerably more weakness in other countries.

But add to this weakness the aggressive language from Germany today urging Russia to stand by its commitments with respect to the Ukraine and you see more risk to growth. Germany's economy is more dependent on Russian trade than are other countries in Europe, and certainly much more than the United States. Germany's willingness to stand up and confront Russia at a time that economic data have weakened is a bold act by German leaders, who well understand the potential adverse impact on Germany of more sanctions on Russia.

On the whole, Europe is having considerably more downside risk than we thought, even several months ago. However, we continue to remind ourselves, as well as readers, that the European Central Bank has a stimulus program in effect. We hope that it can be helpful. However, we have been living in a period where monetary policy has been used liberally around the world without substantial effect. We can hope that Europe is more successful with its ECB stimulus program. However, we have to admit that the current data are making the environment worse than it seemed when the ECB announced its plan and this is putting the ECB behind the eight-ball.

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