Signals from Germany and China offer hope that a key goal of G20 leaders – a better balance in global trade – is more achievable than it looks.
The latest German trade numbers show imports into Europe’s biggest economy surged almost 15 per cent in May, while the country’s trade surplus narrowed to €9.7-billion ($12.8-billion) from €13.1-billion a month earlier. The surplus in Germany’s current account – the broadest measure of trade – plunged to €2.2-billion from €11.3-billion, the Federal Statistics Office said Thursday.
China’s current account advantage also is shrinking at an impressive clip, from 9.6 per cent of gross domestic product in 2008 to about 4 per cent now. On Wednesday, China’s State Administration of Foreign Exchange said its current account surplus will decline for a second consecutive year this year as domestic demand increases.
The German report is for one month only. But when coupled with China’s announcement, it suggests that private consumption in some of the world’s most important economies may be more robust than thought, which would take pressure off of weaker economies with shaky recoveries – such as the United States and Britain – to drive the next phase of the global rebound.
The latest German trade numbers also pierce at least a temporary hole in the notion that the world’s leading booster of belt-tightening measures lacks the moral authority to lecture anyone until its own economy starts buying more goods from abroad.
Just weeks ago, there were suggestions that Germany had replaced China as the worst follower of policies designed to create wealth through exports, at the expense of its neighbours. At the Toronto Group of 20 summit two weeks ago, U.S. Treasury Secretary Timothy Geithner added to the criticism, with a thinly veiled swipe at Europe (and Japan) for failing to take steps to shore up global growth in the medium term by boosting domestic demand.
Germany’s soaring exports in May, more than twice as much as economists had forecast, reflect the rebound in trade around the world. The total value of German imports was likely also buoyed by the euro’s decline during the month, as sovereign-debt troubles rippled around the continent and raised doubts about the currency union’s future.
And according to analysts surveyed by Bloomberg News, China’s export and import data for June may show a third consecutive trade surplus and spark calls for a faster appreciation in the yuan – something economists believe is a necessary condition to a sustained re-orienting of China’s economy toward domestic-led growth.
But as governments in other G20 economies try to tame their deficits and get their stimulus-fuelled debt loads under control, any hint of growth in private sector-led demand in countries such as Germany and China is welcome, economists said. After all, it was gaps in global growth, namely Americans spending too much on cheap goods from overseas while Asian countries exported too much and their consumers spent too little, that exacerbated the U.S. financial crisis two years ago and helped turn it into a worldwide recession.
“This may mean an easier road for governments to rein in their fiscal deficits without really hurting the global economy," Daniel Schwanen, an award-winning economist at the Centre for International Governance Innovation, said in an interview. “In other words, if the private economy is picking up in those countries, unlike what seems to be a hiatus in the U.S. and even in Canada, that might be a sign of a proper rebalancing of the global economy as hoped for, both between shifting from public sector-led demand to private demand, and also from shifting demand away from the (current-account) deficit countries to the surplus countries." At the same time, economists noted, the speed at which domestic demand grows in China will be a function of “structural" changes in the economy that have just barely begun, such as moves to develop a strong social safety net so consumers feel less need to hoard cash for emergencies.
Germany’s deficit-cutting plan is far less severe than those of most other European countries, but it remains to be seen whether less government spending will dampen private consumption even as the country’s industrial production and exports keep marching forward.
“Nobody wants the Germans to decrease their productivity; they’re great pace-setters for the rest of Europe and for many countries around the world," said Paul Blustein, an international economics expert at the Brookings Institution in Washington. “But they need to import more, particularly from their fellow euro zone economies that are in trouble. I don’t see a whole lot of policy levers they can use other than an expansionary fiscal policy, and they’re heading in the opposite direction."
With files from Kevin Carmichael in Washington, and Bloomberg News