For the first time in a lifetime, fears were raised last year over the health of Germany’s exports sector. Should we be getting worried?
Even through the most tumultuous months of the seemingly perpetual eurozone crisis, Germany’s famed exports sector remained an oasis of calm in the desert storm. The country has reported a trade surplus almost without fail since 1952. For policymakers in the UK, Germany’s Mittelstand engine of midcap exporters have taken on almost mythical status. A target to work towards, but almost certainly never to emulate.
Then came August 2014. The headlines screamed blue murder: “German exports in decline!” “Germany headed for recession as export engine stalls!” The story was based around German exports falling by a massive 5.8%, monthly. This was the sharpest decline since January 2009 and came in the same month that industrial output reached a five-year low and business confidence reached its lowest point in 18 months.
In a contemporaneous research note, one of the premier authorities on Germany’s economy, Carsten Brzeski of ING Bank, quipped: “Looking ahead, this week’s German data show that in spite of the soccer miracle in the summer, there definitely won’t be any economic miracle. On the contrary, the economy seems to need a small miracle in September to avoid a recession in the third quarter.”
A few months on, however, rumours of Germany’s trade decline seem to have been greatly exaggerated. You’d be hard pushed to bestow “miracle” status on what actually happened. In truth, it was more of a clerical error.
“August was a real blip,” Christian Schulz of Berenberg Bank tells me. “Holidays were later than usual and this led to factory closures moving from July to August. It was purely because one car factory was closed in August and not July. Exports both in real and nominal terms are not the problem. They’re growing faster this year than last.”
The latest data supports the view of Schulz (who, as anyone who follows his research will know, is a perpetual optimist when it comes to Germany’s economy). The latest monthly data available before GTR went to press was for October – and it makes for impressive reading. The trade surplus widened on the back of the highest monthly exports volume on record.
Shortly after, the ZEW index of investor confidence had rebounded to the highest level since April and showed the sharpest rise since January 2013. It seemed that as expectations of fiscal stimulus from the European Central Bank (ECB) grew, so too did investor appetite. After all, one of the main issues facing the German economy is consumption both at home and abroad. More money in the economy should spell good news for German producers.
Furthermore, a weak euro and falling oil price combined to provide some cheer for German exporters in the run-up to Christmas. But, as the old cliché goes, there’s no smoke without fire. The German economy is in a far less rosy position than it has been for some time. Fears over deflation loom large and the recovery in confidence, while welcome, seems fickle. Concerns over the trade sector remain humming along in the background too, although few of them are of Germany’s own making.
THE RUSSIA EFFECT
Much has been made of Germany’s exposure to Russia – and indeed it is Russia’s largest European export partner. When the EU slapped a ban on the export of equipment and machinery to be used in Russia’s engineering, energy and extractive sectors, it was expected that the German economy would be hardest hit.
Not so, in reality. Russia takes just 3% of German exports. September’s reading (bilateral trade data tends to lag) showed that exports to Russia had fallen by just 15%. So while there will certainly be some companies negatively affected, it’s a drop in the ocean in the grand scheme of things.
Speaking in slightly chirpier tones than a few months previous, Brzeski of ING said: “A month ago, I talked to people in Hamburg port. They told me the sanctions are not on all goods. The other thing is apparently exporters and logistics experts find their way around sanctions. They’re shipping to other destinations and then to Russia. There are ways to get around sanctions. There is not even a standstill.”
Where there’s a will, it would seem there’s a way.
The immediate impact on German exports was connected to – that amorphous concept again – confidence. Russia seems to be more of a psychological problem for many German exporters than a material one. With the turmoil in East Ukraine, exporters scaled back their investments. Uncertainty breeds prudence. German companies weren’t sure what was going to happen (still aren’t, in all likelihood) and so stopped spending money on equipment, machinery, staff and so on. Things might change as the situation deteriorates, but the impact thus far has been indirect.
And how about Germany’s banking sector? According to the bank lobby group BDB, German banks are exposed to Russia to the tune of €16.3bn – under 1% of the country’s total foreign lending. This is down from a high of €20bn in 2010. The German central bank, the Bundesbank, moved in December to allay fears that the commercial sector would face any bother in the face of rouble depreciation and Russia’s general economic strife.
Commerzbank is Germany’s top lender to Russia, with €4.4bn exposure, while Deutsche Bank has lent €5.2bn. These volumes, said the Bundesbank regulation head Andreas Dombret, are manageable.
It’s a view shared by Brzeski, who says: “The banks have scaled back obviously. But is the impact strong enough to have a lasting impact on Germany’s financial sector? No it’s not. Yes they were there, but it’s not as if everything has been stopped. Very often it’s loans to German companies investing in Russia. For the German financial sector, the bigger problem is homemade. It’s a bit overbanked. But that’s a different story, in terms of branches, cost ratios, but this has nothing to do with Russia.”
Perhaps of more serious concern is the ongoing malaise gripping Germany’s biggest export market: the eurozone. In December, eurozone inflation fell to 0.3%, its lowest level since 2009. Italy and France combined account for around 16% of German exports, and they’re both effectively going backwards. This is, of course, not a new problem. Eurozone inflation has been running below the ECB’s target rate of just under 2% since 2012 and for many analysts, deflation is a real possibility in 2015.
Much, then, will depend on Germany’s ability to court new markets for its exports and to increase its trade with China and the US. That exports to non-EU countries rose by 7% over the course of 2014 bodes well for what economists have described as “Germany’s gradual decoupling from the eurozone”, but it is still overwhelmingly at the mercy of its European peers.
Most analysts are sanguine about the medium-term prospects for German exports, but as outlined above, there are many caveats to their outlooks. Structural problems may lie ahead. How long before emerging market economies such as China, India and Indonesia acquire the capability to produce the same kinds of quality goods that have made Germany the world’s leader in high-tech machinery? Truth be told though, there are few countries that wouldn’t swap positions with Germany, in terms of trade. Far from on the decline, it is likely to remain the engine of stability of a eurozone economy that seems constantly on the verge of spluttering to a halt.
Written for Global Trade Review.