German Trade Flows Dive, but Imports Dive Faster

Exports show a slowing trend while imports now show a DECLINING trend. We know that export weakness can’t be for real since export orders have been filled with such life...or have they?

The chart above plots the course of exports Vs export orders using year/year percentage gains. The YELLOW line plots the year/year percentage change in the ‘real narrow euro FX rate’. Two things stand out. One is that the exchange rate does track pretty well the general changes in the growth rate of nominal German exports. And that trend is pointing lower. Also export orders track pretty well and note that export orders are pushing higher. What’s the message?

Obviously the message is mixed. But notice how the FX rate tracks the general direction of exports while orders track exports more closely. But also notice how orders have had a much looser relationship to exports in recent months. Indeed, since about April of 2006 export orders have fluctuated widely and have been a very poor guide for what exports themselves ultimately would do.

I remain skeptical of the predictive power of export orders, given their new unlinking from German export flows. At the same time I am impressed by the general story told by the strong Euro. I think too much emphasis is being placed on orders at a time its relationship to exports has become unstable. We shall soon be able to see if this trust in order strength will bear fruit.