In Part 1 of this series, we reported that German exporters are facing strong headwinds despite the recent lower euro rate compared with other significant currencies, according to a Deutsche Bank report. Global trade has been weak in recent years and in contrast to the development during the past decades it has grown even slower than global GDP. The bank economists say that the combination of the structural global trade slowdown, increased localization of production, demographic changes in Germany, the impact of recent economic policy decisions and further toughening of international competition are likely to be a considerable challenge over the medium term.
This month, Ben Bernanke, former Federal Reserve chairman, argues in a Brookings Institution blog post that:
1) "Although the euro—the currency that Germany shares with 18 other countries—may (or may not) be at the right level for all 19 Eurozone countries as a group, it is too weak (given German wages and production costs) to be consistent with balanced German trade. In July 2014, the IMF estimated that Germany’s inflation-adjusted exchange rate was undervalued by 5-15%. Since then, the euro has fallen by an additional 20% relative to the dollar. The comparatively weak euro is an underappreciated benefit to Germany of its participation in the currency union. If Germany were still using the deutschemark, presumably the DM would be much stronger than the euro is today, reducing the cost advantage of German exports substantially.
2) The German trade surplus is further increased by policies (tight fiscal policies, for example) that suppress the country’s domestic spending, including spending on imports.
In a slow-growing world that is short aggregate demand, Germany’s trade surplus is a problem. Several other members of the euro zone are in deep recession, with high unemployment and with no “fiscal space” (meaning that their fiscal situations don’t allow them to raise spending or cut taxes as a way of stimulating domestic demand). Despite signs of recovery in the United States, growth is also generally slow outside the euro zone. The fact that Germany is selling so much more than it is buying redirects demand from its neighbors (as well as from other countries around the world), reducing output and employment outside Germany at a time at which monetary policy in many countries is reaching its limits."
As noted in Part 1, Deutsche Bank economists say that the profile of German exports makes foreign exchange movements less significant than they are for other economies.
The economists note that since 2012 global trade has been anaemic and in contrast to the development during the past decades it has grown even slower than global GDP. The less dynamic growth since 2012 points towards structural changes that hit German exports in particular: the expansion of global value chains has lost momentum of late and may even have reached a plateau for the time being. "China will be less of a catalyst for world trade than in previous years because of its stronger domestic focus. And the negotiations on new major trade agreements are proving increasingly problematic — especially with respect to the removal of non-tariff trade restrictions and agreement on international standards. Since the mid-1990s there has been fragmentation with respect to trade agreements because of the logjam in international negotiations at the WTO level. As a result the number of regional trade agreements (RTAs), which are always only a second-best solution, has risen rapidly. At present the focus is on mega-RTAs between the US and the EU (Transatlantic Trade and Investment Partnership – TTIP) and in the Asian region (Trans-Pacific Partnership – TPP). If TTIP is implemented in full it should give the German export business a fresh boost. If, by contrast, agreement on the Asian TPP is reached first, then Germany will — as a third country — probably be negatively impacted by the agreement's diversionary effect on trade. The EU's negotiations with, for instance, India and a number of ASEAN nations are progressing only slowly. In addition, the G20 nations have approved partly new restrictive trade measures. Global trade growth should therefore be relatively modest in the next few years, too, especially compared with the dynamism of the pre-crisis years."
Deutsche Bank says that German export growth is, however, heavily dependent on high volume growth in world trade. "That is why a lasting loss of momentum, which we expect to set in, would bring with it a clear headwind for the German export sector. At the EU level efforts need to be made to liberalise world trade further. This would make it easier for companies from Germany to open up markets that will grow faster than Europe in the coming years. If we consider for example that German exports to Denmark with its 5.6m inhabitants were nearly twice as high in 2014 as those to India (with more than 1.2bn inhabitants), then this makes clear the huge potential that lies in such countries which currently often still protect their markets via tariffs and other measures and are barely tapped by the German export industry."
In future the international competition for German companies will intensify further. "The large emerging markets will step up their efforts to climb the value chains. In this respect China's development is impressive; its share of high-tech goods has risen from 6% in the early 1990s to 25% in the meantime. In the
manufacturing sector the share of global exports climbed to 17.5%, whereas in 1980 it was still less than 1%. China's entry into the WTO at the end of 2001 was a key driver. There is also the integration of the second-tier emerging markets (e.g. Thailand, Indonesia, Malaysia, the Philippines and Vietnam) into
the global economy, which in the Asia region is frequently driven by production ties with Japan or China."
The economists conclude: "In our opinion, there is a preponderance of arguments suggesting that German exporters will achieve lower growth rates in future than in the heady days of the globalisation boom. Taking plausible assumptions as the basis for the parameters defined above, German exports could post average growth of just over 4% in the next few years...a constant sectoral shift is a natural feature of an economy whose macroeconomic and political parameters (e.g. demographics, structural foreign demand, technology, location costs) are in flux...Germany has an industrial share of about 22% (France: 11%; EMU: 16%; US: 12%). However, the US, the UK, Sweden, Denmark and Austria are good examples of countries that feature both a lower industrial share and higher GDP per capita than Germany. France, for example, has only half as much industry and at the same time only moderately lower per capita GDP, if the large differences in the world are factored in. So it emerges that different countries can pursue very differing 'business models'."