Analysis/Comment
Analysis: Germany world's top surplus economy; UK tops deficit ranks
By Michael Hennigan, Finfacts founder and editor
Feb 9, 2015 - 9:16 AM

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Angela Merkel, chancellor of Germany since 2005

Analysis: Among the world's big economies in 2014 Germany again was the top surplus economy not only as a ratio of economic output (gross domestic product) but in value terms while the UK topped the deficit countries.

We use the current account metric here: this is the part of the Balance of Payments (BoP) that includes the net balance of goods and services trade, dividends, interest payments, EU contributions and private transfers. The capital account includes long-term capital flows e.g. investments in foreign firms, and profits made by selling those investments and repatriations while short-term capital flows are money invested in foreign currencies and funds held across the world by multinational companies.

The foreign trade balance in 2014 showed a surplus of €217.0bn, which was the highest value ever recorded — the series began in 1950. It exceeds the previous peak of €195.3bn achieved in 2007. In 2013, the trade surplus was €195.0bn

There was a services trade deficit of €41.1bn and the Deutsche Bundesbank estimated the current account balance at a surplus of €215.3bn compared with a surplus of €189.2bn in 2013.

Detail: German exports rose to new record in 2014.

The Ifo institute estimated last week that the largest share of Germany’s annual surplus was generated outside the Euro Area and amounted to €170bn. After turning positive in 2013 for the first time since German reunification, the current account balance with China increased in 2014 to around €4.5bn.

The Ifo Institute, which is based at the University of Munich, also said that Germany’s net capital exports, worth around $285bn were once again far higher than those of China, which posted a current account surplus of around $150bn last year. In third place, and lagging some way behind the two leaders, was the oil-producer Saudi Arabia. This makes Germany the country with the second largest net foreign assets in the world after China.

The German current account surplus in 2014 was 7.5% of GDP  — matching 2013's all-time record.

Meanwhile the UK is the leader of the big economies for deficits and Robert Peston, economics editor of the BBC wrote in December that the current account in the 15 months to September 2014 exceeded 5% of GDP, which is the worst performance since the 1950s.

Last Friday the Office for National Statistics (ONS) reported that the trade deficit widened to £34.8bn in 2014, the biggest gap since 2010 when it stood at £37.1bn. Both exports and imports dipped while the UK registered a surplus in its trade in services, the deficit in goods, excluding oil, stood at a record £110bn.

Despite a fall in sterling by 16% since 2007 on a trade-weighted basis, the trade balance has been at a negative of about 2% of GDP in recent years and Matthew C. Klein explains in a 5-part series on the FT Alphaville blog why the UK is more dependent on foreign capital than at any point since the end of WWII.

Long-term deficits do impact economic well-being over time: the UK has low wages, poor private sector pension coverage similar to Ireland's and productivity has been poor since 2008.

The ONS said last month that the UK ran a trade deficit on goods and services with Spain, France and Germany in 2013, which was partly offset by a trade surplus with Ireland. It also indicates that the deficit with Europe grew in 2013 as a consequence of a larger deficit, with Germany in particular. This trend appears to have continued into 2014, as the goods deficit with Germany reached record levels in the most recent data .

The UK last had a trade surplus and a slight current account surplus in 1998 [pdf] — July 2014 speech by Ben Broadbent, deputy governor for Monetary Policy, Bank of England.

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The US international trade deficit increased in 2014, according to the US Bureau of Economic Analysis last week. The deficit increased from $476.4bn in 2013 to $505.0bn in 2014, as imports increased more than exports. As a percentage of US gross domestic product, the goods and services deficit was 2.9% 2014, up from 2.8% in 2013. The goods deficit increased from $701.7bn in 2013 to $736.8bn in 2014, and the services surplus increased from $225.3bn in 2013 to $231.8bn in 2014.

In the second half of 2014, US exports to China actually declined by 2.1% year-on-year, compared to 15.9% growth during the same period a year earlier. China’s share of the US goods deficit with the world also set a new record in 2014, reaching 47% — that deficit includes Apple's iPhone imports to US.

US Commerce Department data show that the number of American jobs supported by exports has risen from 9.7m jobs in 2009 to 11.3m in 2013.

The US current account deficit is expected to be about 2.3% of GDP in 2014 similar to 2013.

China's State Administration of Foreign Exchange (SAFE) agency reported earlier this month a 2014 current account surplus of $213bn up from $183bn in 2013. There was a US$96bn deficit on its capital and financial account compared with a surplus of $326.2bn in 2013.

In January China reported a 2014 goods and services trade surplus of about $213bn from $142bn in 2013.

The goods trade surplus was at $380bn - the highest on record.

China's current account surplus was at 2.3% of GDP in 2014.

Trading Economics reports that the current account to GDP in China averaged 2.24% from 1980 until 2013, reaching an all time high of 10.1% in 2007 and a record low of -3.7% in 1985.

Japan Monday reported the fourth straight annual decline in its current account.

Foreign investment income boosted by the falling yen, offset the trade deficit.

Exports rose 9.3% from the previous year to ¥74.12tn in 2014, but imports jumped 10.3% to ¥84.49tn. The goods trade balance — exports minus imports — stayed in the red for the fourth year in a row.

The current account surplus fell 18.8% from a year earlier to ¥2.63tn ($22.1bn) — the smallest surplus in comparable data available from 1985.

The goods deficit was a record ¥10.37tn according to the finance ministry while the services sector, including passenger transportation and cargo shipping, posted a deficit of ¥3.09tn last year.

The deficit in the travel balance contracted to ¥125.1bn as the number of foreign travelers arriving in Japan soared 29.4% from a year earlier to a record 13.41m, according to Kyodo News.

Japan's current account surplus was at 0.5% of GDP in 2014.

France’s current account balance has deteriorated gradually since the late 1990s. The IMF has said that it fell from a surplus of 3.1% of GDP in 1999 to a deficit of 1.3% of GDP in 2013. This was led by a worsening of the trade balance on goods and services, which moved from a surplus of 2.5% of GDP in 1999 to a deficit of 2.3% in 2010, while income and transfers balances have been relatively stable.

France's trade deficit fell for the third consecutive year in 2014, easing by 10% to €53.8bn, the trade ministry said on Friday. It noted that the trade deficit has fallen by 30% over the past three years. The drop in 2014 was mainly due to a decline in imports of oil and energy products and also to the fall in oil prices.

France has run a trade deficit every year since 2002 and in 2014 exports rose 3.1% while imports shrank 1.4%.

Last October the IMF forecast a French current account deficit in 2014 of 1.4% of GDP following a minis 1.3% in 2013.

Mathieu Plane, a French economist, wrote last month: "Looking at Europe for the six years from 2008 to 2013, France’s economic performance was relatively close to that of Germany (2.7%), better than that of the UK (-1.3%) and well ahead of Spain (-7.2%) and Italy (-8.9%). Similarly, during this period investment in France contracted less than in the Eurozone as a whole (‑7.7% versus -17%), and unemployment increased less (+3 points versus +4.6). Finally, the French economy’s ability to stand up better to the crisis was not linked with a greater increase in public debt compared to the Eurozone average (+28 GDP points for both France and the Eurozone) or even the United Kingdom (+43 points)."

Italy had a current account surplus of 1.1% of GDP in 2013 and the IMF has forecast a level of 1% in 2014.

The Netherlands current account increased to almost €63bn in 2013, which is more than 10% of the Dutch GDP. The surplus was higher than in 2012, when it amounted to 9.5% of GDP.

However, the Dutch Central Bank notes that dividends and profit retention can have a huge impact.  This is similar to distortions of Irish data where mainly American companies become "Irish" for tax purposes ) — a process known as a tax inversion..

Germany

While China’s current account surplus as a percentage of GDP fell from the 2007 peak of 10.1% to 2.3% in 2014, the European Commission said in a detailed report on Germany published in 2014, that it has recorded a large current account surplus of about 6-7% of GDP since 2007.

The surplus has remained stable throughout the crisis and is not projected to fall below 6% over the coming years.

The IMF said last year that the German current account has been in surplus since 2002, with an average surplus over the last decade exceeding 6% of GDP. The saving-investment balance of households continues to hover around its historical average of about 5% of GDP. The corporate sector contributed strongly to the increase in the current account surplus during the 2000s as the rise in corporate saving exceeded investment, while fiscal consolidation played an important role in the last two years.

"The current account surplus was 7.5% of GDP in 2013, corresponding to an estimated cyclically adjusted surplus of around 8¼% of GDP. While the surplus remains large, its regional composition has changed: the surplus vis-à-vis the Euro Area periphery has fallen from 2% of GDP in 2007 to ⅔% in 2013, but this decline has been more than offset by larger surpluses vis-à-vis Asia and other economies outside of Europe

The IMF staff’s assessment is of a REER (real effective exchange rate) was an undervaluation of 5 –15%.

Since then the euro has fallen to a more than decade low against the US dollar.

The US current account deficit narrowed from its pre-crisis 2007 height of 6% of GDP to 2.3% in 2014.

Germany's exports of goods and service as a ratio of GDP (gross domestic product) was over 50% in 2014; 48% in 2008; 23% in 2000; 25% in 1992 and 24% in 1990 – the year of reunification. The comparable data for France from was 28%, 27%, 29%, 21% and 22%.

The Germans are among the world's best exporters and they have leadership in several capital goods sectors that have been in demand by the rapidly growing emerging economies.

Germany has about 340,000 export firms compared with France's 120,000 and the economy has a bigger ratio of medium to large firms.

Italy's SMEs poor exporters compared with counterparts in Germany, Spain

Ireland has 4,000 exporters, Denmark has 30,000

The European Commission in a detailed 2014 report [pdf] on Germany's surplus said that the expansion of Germany's current account surplus can predominantly be traced back to the private sector. It owes both to an increase in households' net savings and to firms turning from being borrowers to becoming lenders in net terms.

It says: "Germany's trading prowess is supported by the strong export focus of its manufacturers and their success in reaping the benefits of globalisation through global value chains that enhance non-price competitiveness. Additionally, many German manufacturers are leaders in niche markets. While these reasons explain the strength of Germany's exports, relatively subdued import growth has also contributed to the size and persistence of the country's trade surplus. Still, the current account surplus vis-à vis the rest of the Euro Area has nearly halved since the peak in 2007.

Households' consumption and investment patterns reflected the situation of unusually subdued domestic demand, most markedly so until the crisis. Anaemic growth in disposable income caused sluggish private consumption growth. This in turn was due to high unemployment, significant wage moderation and a fall in the total amount of hours worked."

Germany's manufacturing sector has maintained a strong position, while productivity growth in the services sector has stagnated.

The report  adds: "Higher household savings need not result in a rising current account surplus if they are used to finance higher investment. This did not happen in Germany, where weak income growth, adverse demographics and the effects of the property bubble in the 1990s caused subdued residential investment. Investment in Germany has been significantly lower than in the rest of the Euro Area, although the gap has narrowed moderately in recent years. Business investment in buildings and civil engineering facilities in particular has been consistently low. Low trend growth in Germany, relatively restrictive bank lending conditions in the beginning of the 2000s and pressure on companies to improve their balance sheet and to earn a higher return on their investments all reduced the incentive for domestic investment. Nevertheless, the continued weakness of business investment in recent years is at odds with highly supportive conditions for capital formation, such as healthy corporate balance sheets, very low interest rates and a stronger cyclical position. While uncertainty as a consequence of the crisis is one reason why companies hold back on investment, there is a tangible risk that persistently low investment by companies could hamper Germany's economic growth in the longer run."

The European Commission also said that "public sector investment has been falling for a long time in Germany, resulting in a sizeable investment gap compared to the Euro Area accumulating over time. The low investment rate in particular reflects the gradual scaling back of public infrastructure investment, for both maintenance and expansion of infrastructure. This has occurred almost entirely at the level of municipalities, due also to limited funding, which investment planning and financing mechanisms have not been able to remedy. Moreover, despite a slight increase in expenditure, education spending in Germany remains low by international standards, particularly for primary and lower secondary education. Although Germany's overall fiscal stance is appropriate, its public sector has not in all respects invested sufficiently in the future growth and efficiency of the economy."


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