Germany is the world’s fourth largest economy and Europe’s largest. Part of its strength has come from its exports, which last year increased by 11.4% to $1.3 trillion – the first time it had ever exceed the $1 trillion mark. Germany, however, is by no means the country with the largest export sector – that mantle was taken from them by China, whose exports rose 20.3% last year to reach $1.9 trillion.
At the same time as exports have been rising from Germany, imports have also increased, showing a recovery in domestic demand as well. Despite this, Germany’s foreign trade surplus increased slightly to €158.1 billion (from €154.9 billion).
However, in the last month of 2011, its export growth did slow – the fastest drop in nearly 3 years – and that is expected to signal the trend for 2012. As the eurozone debt crisis continues to cause problems, German exports have been forecast to grow by only 2% this year, with economic growth expected to be as low as 0.7%. This is a marked change from last year, where the Germany economy grew by some 3%. Help for the eurozone is unlikely to come form Europe’s second largest economy, France, where growth in the first 3 months of 2012 is expected to be zero and figures have shown a widening trade deficit, with issues of competitiveness at the forefront. The following articles look at Germany’s prowess in the export market and the likely developments over the coming year.
German exports drop is steepest in nearly 3 years Reuters (8/2/12)
German exports set record of a trillion euros in 2011 BBC News (8/2/12)
German exports broke euro1 trillion mark in 2011 The Associated Press (8/2/12)
Surprise drop in German industrial output Telegraph, Angela Monaghan (7/2/12)
French trade deficit hits high, competitiveness at issue Reuters (7/2/12)
French trade deficit casts shadow on campaign Financial Times, Hugh Carnegy (7/2/12)
German exports fall at fastest rate in three years, sparks fears over Europe’s bulwark economy Telegraph, Louise Armitstead (8/2/12)
Questions
- What is meant by a trade surplus?
- Briefly examine some of the factors that may have contributed to Germany’s rising exports throughout 2011.
- How has the eurozone debt crisis impacted the Germany economy and in particular the export sector?
- The articles that look at France refer to a growing trade deficit, with competitiveness being a key issue. What is meant by competitiveness and why is the French economy suffering from a lack of it?
- Does France’s membership of a single currency reduce its ability to tackle its competitiveness issues?
- Why is German growth expected to remain sluggish throughout 2012? Given that Germany is a member of the eurozone, what government policies are open to the government to boost economic growth?
- China has overtaken Germany as the largest exporter, with growth of 20.3% in 2011. What factors have allowed Chinese exports to grow so quickly?
The outbreak of E. Coli has already cost lives, but it is also costing livelihoods of farmers who rely on producing and selling agricultural produce. Immediately following the outbreak in Germany, the blame was put on Spanish producers of cucumbers, which lead to the destruction of tens of thousands of kilos of fresh produce, costing Spain an estimated £177m per week in sales. Although Spain is not the source of the outbreak, the problem has not disappeared and will now affect the whole of Europe: at least until the source is identified. Countries such as Spain, France and Germany are big exporters to Russia and these countries are likely to take a big hit with the Russian health service banning imports of EU vegetables. The impact of this action (together with other countries implementing similar strategies) has not only affected agricultural producers, but is also having wider impacts on other sectors, including transportation. If no-one wants to buy the products, there’s very little use for the companies and indeed drivers to deliver them.
The Spanish economy will be looking for compensation from Germany for the losses they incurred, when sales of fruit and vegetables practically ceased following Germany’s initial accusation. As the Spanish Prime Minister Zapatero said:
“We acted as we had to, and we are going to get reparations and the return of Spanish products to their rightful place. … I believe that any other interpretation or any effort to politicise the huge mistake made by the German authorities is totally unfair.”
The effects of this outbreak have spread to UK supermarkets and producers. The former have reported a slight drop in sales of fruit and vegetables, but have not taken this opportunity to drop the prices paid to British growers, which is particularly important for cucumber producers, given the high production costs. Sarah Pettitt of the National Farmers Union said she was ‘extremely encouraged to hear that the major supermarkets … are not using this unfortunate situation as an excuse to drop prices to British growers.’ In fact some believe that the outbreak could be good for UK producers, as consumers increasingly turn to home-produced products. While the source of the outbreak remains unknown, so does the future of agricultural producers throughout Europe, as well as all those that have any dependence on this huge industry.
E. Coli outbreak: UK cases rise to 11 BBC News (4/6/11)
E coli source hunted as growers fear sales slump Guardian, Robin McKie (4/6/11)
Farmers reel as outbreak hits demand Financial Times, Matt Steinglass and Victor Mallet (3/6/11)
Spain seeks compensation for E. Coli blame BBC News (3/6/11)
E.Coli: Economic impact on the agriculture industry BBC News, Richard Anderson (3/6/11)
Spain says Germany mulls EU aid over cucumber slur Associated Press (3/6/11)
Rose Prince: Cucumbers, diet and Prof Moth Telegraph, Rose Prince (4/6/11)
Questions
- Why have cucumber producers been experiencing falling profit margins in recent years?
- Could the outbreak of E Coli bring any benefits to the UK economy?
- What are the costs and benefits to Russian consumers and producers from the protectionists measures that have been imposed on EU imports of fruit and vegetables?
- Which sectors within the European market are likely to experience the biggest problems?
- Explain why the Chairman of the National Farmers Union was ‘encouraged to hear that the major supermarkets … are not using this unfortunate situation as an excuse to drop prices to British growers’. Why would supermarkets have an incentive to do this?
Gross Domestic Product (GDP) is a measure of the total value of goods and services produced in the domestic economy. It gives us an idea about whether national output is growing or falling and by how much. A recession represents a period of 2 consecutive quarters where economic growth is negative. Following the quarters of declining growth, the UK economy slowly began to pick up, but in the final quarter of 2010, economic growth once again turned negative. Data first showed a decline of 0.5%, which was then revised down to 0.6%. However, the most recent data from the ONS has put the decline in economic growth back to just 0.5% and the snow we experienced is supposedly to blame. Still a decline, but not as much as previously thought.
What does this mean for the economy? It might be better than previously thought, but it does little to change the economic outlook for the economy. Furthermore, the UK’s position remains relatively weak compared to other nations. As Chris Williamson from Markit said:
“The decline [in growth] overstates the weakness in the economy, reflecting the bad weather at the end of last year, but is nevertheless still a dire reading compared to the UK’s peers.”
The UK also saw a declining trade balance in the final quarter of 2010 to £27bn, showing that the UK was importing more than it was exporting. This was the second biggest deficit since the second quarter of 2009. Whilst the data for growth is a little better, the key for the UK economy will be what happens in Q1 of 2011, especially given that inflation is so far above the target. In order to get inflation back to its 2% target, interest rates need to rise, but this may put the economic recovery in jeopardy. The key is likely to be confidence. If confidence returns to the economy, aggregate demand may begin to rise and put the economy back on track to achieve its 1.5% forecast rate of growth.
UK GDP less bad than forecast at end-2010, Q1 key Reuters (29/3/11)
UK GDP figures show smaller fall BBC News (29/3/11)
UK GDP shrinks by less than expected: reaction Telegraph (29/3/11)
UK growth figures: what the economists say Guardian (29/3/11)
Disposable income falls by 0.8% The Press Association (29/3/11)
British economy shrank 0.5% in fourth quarter Associated Press (29/3/11)
UK GDP figures revised higher The Economy News (29/3/11)
Questions
- What is GDP? Is it a good measure of the standard of living in a country?
- To what extent does the revised figure change the economic outlook for the UK economy?
- How do you think the Monetary Policy Committee will be affected in their decision on changing interest rates, given this new GDP data?
- What factors are worsening the UK’s relative to other countries who also suffered from the recession?
- How were financial and currency markets affected by the revised GDP data? Was it expected?
The pound is regarded as an international currency, but its value has been declining throughout the financial crisis. Indeed, this downward trend is one of the factors that has prevented the recession in the UK from getting worse. As the exchange rate changes, the relative competitiveness of a country’s products changes and this therefore affects exports and imports.
However, despite a declining pound, exports from the UK have fallen and this has contributed to an unexpected global goods trade deficit in January of nearly £8 billion – the largest level since August 2008 and well above the forecast of £7 billion. This is putting further pressure on the pound. A key to the UK’s economic recovery was argued to be growth in exports, but this now appears to be a somewhat forlorn hope. The figures released show that exports slumped 6.9% to £19.5 billion in January, whilst imports only fell by 1.6%. A contributing factor might be the bad weather that hit the UK in January, but the long-term decline of manufacturing in Britain has also been put forward as a reason.
The following articles consider the UK’s trade deficit and the possibility of an export-led recovery.
Articles
January trade deficit widens as exports fall Guardian, Kathryn Hopkins (9/3/10)
UK trade gap widens to worst in 17 months BBC News (9/3/10)
Exports plunge heaps pressure on pound Independent (9/3/10)
Pound slides back against dollar and euro Guardian, Ashley Seager (21/9/09)
Trade gap widens despite weak pound Financial Times (9/3/10)
UK exports plunge by £1.4 billionThe Press Association (9/3/10)
Pound falls again on deficit fears Guardian (9/3/10)
UK trade gap widens as exports sink Wall Street Journal, Nicholas Winning (9/3/10)
Rebalancing, deferred BBC News blogs, Stephanomics Stephanie Flanders (9/3/10)
Global recovery is helping UK, says Bank of England’s Sentance Guardian, Larry Elliott (18/3/10)
Pound Declines as Investors Bet Bank of England Will Hold Rates BusinessWeek, Lukanyo Mnyanda (20/3/10)
Data
For UK balance of trade data, see UK Trade (Office for National Statstics)
For exchange rate data, see Statistical Interactive Database (Bank of England)
Questions
- How is the value of the pound determined?
- Illustrate a depreciation of the pound on a diagram. What are the factors that could cause this?
- When the value of the pound falls, why should UK goods become more competitive?
- Explain why an export-led recovery was a possibility for the UK economy. How can we use the transmission mechanisms to help explain this?
- Despite a weak pound, exports have fallen. What are the explanations for this?
- What are the consequences of a widening trade deficit and how can it be tackled?
It’s not just the roads in the UK that were frozen, as the Bank of England unsurprisingly decided to keep interest rates frozen at 0.5%. Furthermore, many economists do not expect to see interest rates increase for some time. Roger Bootle has predicted that rates could stay low for up to 5 years and this will contribute to a continuing weak pound and spell further trouble for importers and their customers.
The Bank of England also left its money-creation programme of ‘quantitative easing’ unchanged, but next month it will have to decide whether to extend quantitative easing beyond the limits of £200 billion that it set back in November.
Whilst we are supposedly beginning our economic recovery – with 2009 quarter 4 figures showing the first rise in output since the first quarter of 2008 – its strength remains questionable. Indeed, the rise in output in the last three months of 2009 was a mere 0.1%. So how important are interest rates in helping to sustain the recovery? Can they really pull us out of the recession by remaining at just 0.5%? Read the articles below which look at freezing interest rates and quantitative easing.
FTSE unaffected by interest rate decision In the News (7/1/10)
Freeze on UK interest rates BBC News (7/1/10)
Bank of England may raise interest rates as soon as March, leading economist predicts Telegraph (7/1/10)
Interest rates and quantitative easing on hold Guardian, Larry Elliott (7/1/10)
Bank of England extends quantitative easing by £25bn – but is it enough? Guardian, Larry Elliott (5/11/10)
Questions for QE BBC News blogs, Stephanomics, Stephanie Flanders (7/1/10)
Interest rates could stay low for 5 years, says Bootle BBC News (7/1/10)
Questions
- How do low interest rates contribute to a weak pound? How does this affect exporters and importers?
- What is quantitative easing? Should the QE programme be extended? What are the arguments for and against this in terms of economic recovery and public debt?
- How much of an impact do you think the recession will have on government policy over the next few months?
- Explain the transmission mechanisms by which changes in interest rates affect the goods market.
- If the Bank of England were not independent, what do you think would be happening to interest rates?
Germany is the world’s fourth largest economy and Europe’s largest. Part of its strength has come from its exports, which last year increased by 11.4% to $1.3 trillion – the first time it had ever exceed the $1 trillion mark. Germany, however, is by no means the country with the largest export sector – that mantle was taken from them by China, whose exports rose 20.3% last year to reach $1.9 trillion.