Best of the Week
Most Popular
1.Spain Ignores Scotland Lesson as Catalan Independence Referendum Could Spark Civil War - Nadeem_Walayat
2.Used Car Buying From UK Dealer Top Tips, CarMotion.co.uk Real Customer Experience - N_Walayat
3.Spanish New Civil War Begins as Madrid Regime Storm Troopers Quell Catalan Independence Rebellion - Nadeem_Walayat
4.Virgin Media Broadband Down, Catastrophic UK Wide Failure! - Nadeem_Walayat
5.Are the US Markets setting up for an Early October Surprise? - Chris_Vermeulen
6.The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It -John_Mauldin
7.Stock Market Crash 2018; Will it Prove to be Another Buying Opportunity - Sol_Palha
8.The Profoundly Personal Impact Of The National Debt On Our Retirements - Dan_Amerman
9.Stock Market as Good as it Gets; Like 2000 With a Twist -Gary_Tanashian
10.1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - Nadeem_Walayat
Last 7 days
“Great Rotation” Ahead; Will it Be Inflationary or Deflationary? - 21st Oct 17
The Trigger for Volatility, Rates and the Next Crisis - 21st Oct 17
Perks to Consider an Agent for Auto Insurance - 21st Oct 17
Emerging Megatrends Hurting Consumers - 21st Oct 17
A Catalyst of the Stock Market Bubble Bust - 21st Oct 17
Silver Stocks Comatose - 21st Oct 17
Stock Investors Ignore What May Be The Biggest Policy Error In History - 20th Oct 17
Gold Up 74% Since Last Stock Market Peak 10 Years Ago - 20th Oct 17
Labour Sheffield City Council Employs Army of Spy's to Track Down Tree Campaigners / Felling's Watchers - 20th Oct 17
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Here’s How Germany Buys Time From China

Economics / Germany Feb 15, 2017 - 01:50 PM GMT

By: John_Mauldin

Economics

BY JACOB SHAPIRO : As we’ve written before, Germany’s economy has avoided problems besetting most export-dependent countries in the last two years.

In 2015, Germany accomplished this by compensating for decreased demand from China by substantially increasing its exports to the United States and the United Kingdom. In 2016, the situation was reversed. Exports to China increased while exports to the US and UK declined significantly.


The most important geopolitical question in Europe this year is whether Germany can stave off a decline in its exports for a third consecutive year.

We forecast that German exports will fall in 2017, and the most recent trade data released by the Federal Statistical Office (Destatis) both supports and challenges the thought process behind that forecast.

Looking at the Numbers

To understand the significance of the change in German trade patterns, let’s go back a few years. 2015 was the first time in 54 years that a country other than France was the top destination for German exports. German exports to the US increased by 18.7 percent in 2015, representing 9.5 percent of total German exports.

Meanwhile, German exports to the UK—the third largest destination for German goods—enjoyed a similarly meteoric rise. Those exports increased by 12.8 percent in 2015, approximately 10.1 billion euros. For the year, 7.5 percent of total German exports went to the UK.

The growth in German exports to the US and the UK was under 40 percent of the total growth in value of German exports in 2015. This was important because Germany saw major declines in exports to two important trading partners in 2015: China and Russia.

The decline in exports to China was somewhat modest, with a drop of 4.2 percent, or about 3.2 billion euros. The decline in exports to Russia was starker, declining 25.5 percent from the previous year, or roughly 7.4 billion euros. The increase in exports to the US and the UK absorbed the blow of the unexpected decline in demand from China and Russia.

Germany’s Problem

The problem for Germany was not necessarily the absolute figures themselves. Even without the growth in exports to the UK and the US, German exports increased enough to cover the loss. This was due primarily to demand from other European countries.

The deeper problem was that China and Russia were both important markets that German companies had bet would increase demand for German products.

Exports to China had been steadily increasing since 2001, with a slight hiccup in 2012. Before the 2014 revolution in Ukraine and the 2015 drop in oil prices, Russia was considered one of the top potential growth markets for German products. Exports to the UK and US stabilized the situation, but a serious question remained: Could Germany depend on exporting to the US and UK at similar levels for a sustained period?

The most recent available data from Destatis covers January to November 2016, but it still provides a clear answer to that question: The 2015 level of US and UK imports of German goods was unsustainable. German exports to the UK declined by 3.1 percent in the first 11 months of 2016. German exports to the US declined by double that figure, or 6.2 percent.

Germany saw exports in the first 11 months of 2015 increase by an impressive 6.5 percent. In January to November 2016, growth in German exports was just 0.8 percent. There is one significant bright spot for Germany in the data. German exports to China rebounded in 2016, increasing by 3.6 billion euros, or 5.5 percent year-on-year.

“Changing of the Guard” Myth

This development recently has been trumpeted as a “changing of the guard” in both the German and Chinese press. But even with a 6.2 percent decline, the US remains the largest destination for German exports. German exports to the US in 2016 were worth 66.9 billion euros more than German exports to China. Considering that 46.8 percent of Germany’s GDP comes from exports, the importance of the US to Germany’s export machine should not be underestimated.

The rise in Chinese demand for German exports is slightly surprising considering that Chinese imports have been decreasing steadily since 2011. And Chinese imports of German goods declined in 2015. This decline was in part due to the decline in global commodities prices. The volume of Chinese imports increased even as prices fell from 2011–2014.

This, however, began to change in 2015. A study published last May by the International Monetary Fund noted that the volume of Chinese imports decreased by 0.7 percent in 2015, and that both commodity and non-commodity items contributed to this decline.

The latter category is the important one from the German perspective. The bulk of German exports to China are not raw materials like iron ore, but finished products like cars and various machinery.

Non-commodity imports declined by 8 percent in 2015, 35 percent of which was attributed to a fall in imports of the types of products Germany exports.

More on China

The most recent data available from China’s General Administration of Customs showed that Chinese import growth in 2016 fell by 5.5 percent in terms of value. It was not just Chinese imports that fell, however. Chinese exports also decreased by 7.7 percent year-on-year.

This is important because a significant portion of Chinese imports are not meant for Chinese consumption. They are parts that are used in goods that China assembles and then exports. Whether it is demand for the raw materials or parts involved in production, or just the financial health of the state-owned enterprises involved in exports, a decline in Chinese exports puts further pressure on Chinese imports. This in turn is bad news for a country like Germany hoping to increase exports to China.

The other thing to keep in mind is that China relied once again on stimulus to meet its GDP growth targets for the year in 2016. Much of this economic growth was dependent on construction or investment in the real estate market, which has resulted in fears of a potential bubble in the housing market that China is now actively seeking to rein in.

Meanwhile, corporate debt in China has increased to 169 percent of China’s GDP, according to the Bank of International Settlements. And the specter of non-performing loans is casting a long shadow once more on China’s books.

The Real Picture

China’s solutions are ultimately stopgaps, and steady Chinese demand for German goods is unreliable at best. There are limits to how much Germany can increase its exports to the US and the UK. German trade data also emphasize just how dependent Germany is on the rest of Europe.

It remains to be seen if GPF’s forecast on German exports comes to fruition. But whatever the precise figure of export change ends up being is ultimately less important than understanding this key German weakness. The news that China has become Germany’s largest trading partner should be read as nothing more than a story about the precarious economic situation in which Germany finds itself.

Prepare Yourself for Tomorrow with George Friedman’s This Week in Geopolitics

This riveting weekly newsletter by global-intelligence guru George Friedman gives you an in-depth view of the hidden forces that drive world events and markets. You’ll learn that economic trends, social upheaval, stock market cycles, and more… are all connected to powerful geopolitical currents that most of us aren’t even aware of. Get This Week in Geopolitics free in your inbox every Monday.

John Mauldin Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife