EMU Trade Deficit Is Shrinking

The EMU trade deficit has been contracting for a number of months. The deficit declined in January to €11.3bln from €13.4bln in December. The 12-month average for the deficit is €27bln. To analyze EMU trade, I look at manufacturing and nonmanufacturing trade and trends separately. Viewed that way, the manufacturing trade surplus was lower in January as it fell to €26bln from €31bln in December. That means trade improvement was driven by performance on the nonmanufacturing accounts, and it was. The nonmanufactures deficit shrank to €37.3bln in January from €44.3bln in December. The manufactures surplus worsens by €5bln month-to-month while the nonmanufactures account improved by €7bln month-to-month causing the overall trade balance situation to improve. The improvement on the nonmanufacturing account traces back to August of last year while the drop off in the manufacturing surplus is a new development.

European trade trend overview The overpowering trend for EMU trade overall as well as for individual countries in Europe is that trade flows are slowing. Despite inflation being high, the growth rates of nominal trade flows are slowing. Year-on-year growth is faster than 3-month annualized growth for exports of manufactured and nonmanufacturing; the same is true for EMU imports. For another eight European economies, we see the same slowing in annualized 3-month trade flow growth compared to year-over-year growth.

EMU trade flow trends EMU export trends show exports of manufactures are slowing transiting from 5.8% growth over 12 months to a -13.6% annualized pace over three months. Nonmanufactured exports are more resilient slowing only modestly to a 19.1% annual rate over three months from 21.3% over 12 months. Together these flows cause overall EMU exports to slow sequentially from 12-months to 6-months to 3-month, logging a 3-month decline at a -8.2% annual rate.

EMU import flows show imports of manufacturers decelerating from 5.1% growth over 12 months to a 3-month pace of -19.1%. Nonmanufactures imports slow from an 11.8% gain over 12 months to an annualized three-month drop at a -45.5% annual rate. As a result, overall imports in the EMU also decline sequentially from growth of 7.2% over 12 months to a contraction at a -16.6% pace over 6 months to a -29.4% pace over 3 months.

Country patterns Germany and France echo the pattern of decline in the EMU with exports and imports in both countries showing sequential decelerating trends from 12-months to 6-months to 3-months. In the U.K., exports fall sequentially and at an alarmingly fast pace over 3 months, while the decline in imports is muted by comparison. Although the U.K. also shows a decline in imports over 12 months which is a weaker result than for either Germany or France - or EMU for that matter – U.K. exports are much stronger than for Germany, France, or the EMU.

Exports only We include export only trends for five other European nations. They all show weaker growth over 3 months than over 12 months, but also show a great deal of variation in their growth rates compared over each horizon. Belgium and Finland have the weakest three-month growth, registering sharp declines. In comparison, exports by Spain, Portugal, and Italy log rates of growth in double digits or rates that round up to double digits over three months. Spain, Portugal, and Italy also log export increases over 12 months while Belgium and Finland log modest declines over 12 months.

Trends on balance On balance, the trade results echo the refrain of global trade slowing. Exports are slowing and imports are slowing. The sizeable decline in imports over 3 months in the EMU, Germany, France, and the U.K. tells of flagging domestic demand and weaker prices. Over six months exports and imports decline on all total trade metrics in the table except for a rogue 1% export increase (annualized) for Spain over six months. Data clearly point to a coming slowdown. Adding to that view are comments from the Bundesbank today that point to a slight drop in Germany GDP in the first quarter of 2023.

The list of central bank challenges is growing. There is still the uncertainty from the Russia-Ukraine war. And inflation is still too hot. But now there is a legacy of bank failures in the U.S., and, in Switzerland, a shotgun marriage was conducted between Credit Suisse and UBS. Economic and finical system risks are not getting lower.