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Economy in Brief

EMU Trade Deficit Surges on Rising Imports
by Robert Brusca  September 15, 2022

Chart 1: EMU Trade

The trade balance in the European Monetary Union in July 2022 fell to 40.3 billion euros from 32.2 billion euros in June, a relatively sharp drop month-to-month marking a sharp expansion in the deficit. The deficit on the trade account has been on a very slippery slope over the past two years. The EMU trade balance in the 12-month period ended 12 months ago (July 2020 to July 2021) showed the European Monetary Union was still running a surplus on its trade account of approximately €20 billion. However, over the most recent 12 months, that has turned to a deficit of about €15 billion. And that slippage is evident in shorter averages as well as the six-month average deficit is €27.7 billion, and the three-month deficit is at €33.7 billion. This is a metric that had been chronically in surplus and now it has completely flipped to show a substantial enduring deficit in trade.

There has been slippage in both the balance of trade in manufactured goods as well as nonmanufactured goods, but the slippage in nonmanufactured goods has been greater by a wide margin. Month-to-month the manufacturing balance of trade has slipped by €1.6 billion while the balance on nonmanufacturing trade has slipped by €6.4 billion. If we look at the current monthly trade balances compared to their 12-month averages, the manufacturing surplus at €17 billion is €6 billion worse than its 12-month average, while the July deficit in nonmanufacturing trade of €57.4 billion is €19.2 billion worse than its 12-month average.

The trade statistics on exports and imports reveal clearly what is happening. We know that a lot of it is related to price developments and inflation in raw materials and in the oil trade. Because of inflation, the nominal flows on the import side are expanding at a much faster pace than the flows on the export side. There are relatively more commodities being imported than exported. And among commodities, those being imported have a higher inflation rate than those being exported.

Exports of manufactured goods are up 11.9% over 12 months, rising at a 4.3% annual rate over six months and slowing further to a 2.4% annual rate over three months. On the import side, manufactured imports are up at a 26% annual rate, slipping into a 15.9% annual rate over six months and slipping further to an 8.6% annual rate over three months. Both exports and imports of manufactured goods show a slowdown is in train from 12-months to six-months to three-months. And over each of those horizons, the growth of imports exceeds the growth of exports.

Nonmanufacturing trade exports are surging at a 43% annual rate over 12 months, accelerating to a 55.1% annual rate over six months and slowing only technically to a 52.1% annual rate over three months. While the export growth rate is substantial, the import growth rates are colossal. Over 12 months nonmanufacturing imports are up 100.7%. Over six months nonmanufacturing imports are up at a 107.3% annual rate. Over three months nonmanufacturing imports log a 44.4% annual rate of growth, a substantial slowdown from over 100%, and finally, a growth rate that is below the growth rate for nonmanufactured exports over three months.

Trade trends are clearly being dominated by inflation and by the trade of nonmanufactured goods. However, the usual dominance in performance of European trade in manufacturing has been impaired during this period, evidenced by the slipping surplus in manufacturing that is diminishing steadily. Some of this trend traces to Germany and its past exploitation of trade with both China and Russia. Now, of course, Russian trade is under sanctions and China, in pursuing its zero COVID policies, has engineered a substantial slowdown in GDP; its slower growth has led to containment of its imports.

Trade by some selected countries
Country level statistics show German exports are up 14.4% over 12 months, at a 21.4% pace over six months and at a 15.5% pace over three months. Over the same horizons, imports are rising at a 29.3% annual rate over 12 months, at a 33.5% annual rate over six months, and at a sharply slower 6.4% annual rate over three months. On all those horizons, import growth exceeds export growth except over three months. there is no clear trend to these flows, but three-month import weakness hints at slowing.

For France exports grow 20.9% over 12 months, at a 6.1% annual rate over six months, and at a 15.3% annual rate over three months. French exports hold their pace after a six-month swoon and don't show any difference in their trend growth rate. However, French imports are up at a 30.9% annual rate over 12 months that slows to a 25.1% at an annual rate over six months and slows further to a 19.5% annual rate over three months. That still leaves French imports with a moderate slowing trend.

In the U.K., exports expressed in pounds sterling, grow at a 26.6% annual rate over 12 months, accelerate to a 58.1% pace over six months and fall back to a 23.9% pace over three months. U.K. imports rise 29.4% over 12 months, at a 10.7% pace over six months and at a 1.1% pace over three months.

U.K. imports show the clearest pattern of deceleration. German imports slow sharply over three months. France shows an ongoing moderate import slowdown. Finland, a Northern European country and Portugal, a Mediterranean nation, show export trends that are more consistently firm-to-strong like those in Germany, only stronger. Finland shows exports up 33.5% over 12 months and rising at a 30% annual rate over six months and three months. Portugal shows exports rising at a 32% annual rate over 12 months and six months and accelerating to a 46% annual rate over three months. Belgium, a country in the heart of Western Europe, shows the exports up 31% over 12 months, then slowing to 19% over six months, and holding growth strong at a 23% annual rate over three months. Many of the country trends in the EMU diverge even among close trading partners.

Chart 2: Baltic Dry Goods Index signal weaker trade

Clearly the trade growth rates for the European monetary union are being driven by the large countries and there is a considerable amount of variation across countries. There is so much difference between the performance of manufacturing and nonmanufacturing goods and so much inflation that is particularly concentrated in homogeneous commodity trade products that is driving these differences in growth rates. The nominal growth rates of trade flows are going to depend a great deal on the commodity mix of trade of individual countries. Those exporting more commodities and semi manufacturers will probably see stronger nominal growth while those exporting more manufactured goods will probably see less growth. And the same sorts of things are going to hold true for the import side.

The overall data for the European Monetary Union show a relatively sharp slowdown in nominal export growth for manufactured goods that suggests export markets are slowing. On the import side, there's also been a sharp slowing although nominal import growth is faster than nominal export growth that may be more because of the commodity mix of exports versus imports rather than because European economies are growing stronger than their export markets. These things are hard to tell from nominal data.

Summing up
What is clear is that inflation has had an enormous impact on these trade flows and inflation has had a substantial hand and worsening the trade balance situation in Europe. The Baltic dry goods index makes the case that globally trade flows are slowing down. Certainly, we see that oil prices have been turning lower partly on concerns about growth going forward. Data from the U.S. have been mixed showing a number of expenditure side and manufacturing reports that have been weaker; however, the pace of job growth is still robust. European activity data generally have showed encroaching weakness. In Asia, Japan's growth is weak and China's growth has been adversely impacted by its zero COVID policies that continue to create sporadic lockdowns across China; separately, problems among property developers lurk in China. Overlaid on this scenario of weakening growth is still high but slightly falling inflation and a geopolitical mix around the world of heightened risks just about everywhere. It remains a challenging time for policymakers and a complicated environment which to make forecasts. The simplest points that would seem to have robustness to them are (1) that inflation is high and (2) will remain stubborn and that (3) growth is slowing and (4) will probably transition to recession. Good luck.

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