Why has eurozone trade slowed?
The breakdown of the eurozone’s Q1 GDP growth shows the slowdown in activity was driven by net trade (exports minus imports).
Sharp drop in exports
Although both imports and exports collapsed in the first quarter, the fall in imports was not enough to offset the effect of the fall in exports. However, some of the weakness can be explained as a reversal of what was a particularly strong export figure in Q4.
Where has the weakness come from?
Trade data is notoriously difficult to work with but we can break the data down into geographic contributions to get an idea of what happened in Q1.
The chart below shows the contribution to quarterly growth in the exports of goods in euros by destination. The chart shows that the main cause for the deceleration in growth between Q4 2017 and Q1 2018 is the fall in exports to "Asia other" (Asia excluding Japan and China). The UK was the third biggest negative contributor.
Contribution to growth in exports1 by destination
Source: Thomson DataStream, Schroders Economics Group. 26 June 2018.
However, if Q4’s export growth was unusually strong, we should perhaps also compare Q1 growth with that of Q3. Here we find that “Asia other” again had the largest negative impact with the UK once again in third place.
Taken together, this suggests that “Asia other” and UK are the culprits behind Q1’s slowdown.
Within “Asia other”, it seems OPEC2 members like Saudi Arabia and the UAE are largely behind the deceleration, making up 40% of the decline. Other significant falls in exports include those to OPEC as a whole, Malaysia, India, Hong Kong and China. Interestingly, to the upside, exports to Japan and Nigeria were very strong.
No sign of improvement or further decline
Looking ahead, we only have April data for the second quarter so far, as shown above, but it does show some rebound in exports to Asia. However, exports to China have continued to weaken and exports to Japan have reversed. This is just one month's worth of observations in a very volatile series, but overall there are no signs of a turnaround, or further weakness for that matter.
Where does this leave eurozone growth?
An ongoing slowdown in trade is obviously bad news for the economy. However, it is not all doom and gloom. Although the domestic economy has room for improvement, domestic demand has been better, with the European Central Bank (ECB) reporting a notable pick-up in lending data.
That said, there are storm clouds on the horizon. Inflation is likely to remain elevated, thanks to higher oil prices and the recent depreciation in the euro. This will affect the purchasing power of households although strong employment growth should help ease the pain somewhat. Furthermore, fiscal policy has loosened.3 in many member states, with pressure growing for even more relaxation of budget stances.
On the monetary policy front, the ECB already confirmed that interest rates will remain on hold until “through the summer” of 2019. This confirms to markets that rates will indeed rise next year. We now forecast the first hike to come in Q3 2019 with another in Q4, taking the deposit rate to zero and the refinancing rate to 0.5%.
Any references to countries are for illustrative purposes only and not a recommendation to buy and/or sell.
1. Exports in goods only, using nominal working day adjusted data in euros. ↩
2. Organisation of Petroleum Exporting Countries↩
3. Loose fiscal policy is characterised by an increase in government spending and/or a reduction in taxes↩
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