The issue of trade between countries has seen something of a change in perception during the Covid-19 pandemic crisis. Previously it was reported as an unequivocal good thing but now there are increasing questions about finding yourself reliant in other countries for what are considered to be strategic items. By other countries we mostly mean China. There were also concerns about the Chinese dumping of products to gain market share but cheaper prices outweighed that. Now more questions are being asked and this comes on top of a period called The Trade War where the Make America Great Again policy of President Trump ended up raising barriers to good trade. The most conspicuous example of this was for cars and vehicles.
This is an area where after a difficult weekend the Euro area can step forwards with a smile. From the ECB earlier.
In May 2020 the current account of the euro area recorded a surplus of €8 billion, compared with a surplus of €14 billion in April 2020.
This is a familiar situation as the Euro area regularly runs surpluses as the annual figures show.
In the 12-month period to May 2020, the current account recorded a surplus of €264 billion (2.2% of euro area GDP), compared with a surplus of €318 billion (2.7% of euro area GDP) in the 12 months to May 2019.
It is a factor which supports the value of the Euro on the foreign exchanges. There is a flow of demand for it to pay for the Euro area exports surplus. As it happens this morning has seen it rally to 1.146 versus the US Dollar and through 0.91 versus the UK Pound. So the theme works, although of course that is subject to ebb and flow from other factors.
Next we see that whilst the surpluses are ongoing the size has declined. Even pre pandemic a 0.5% fade on the economic output or GDP numbers mattered because the Euro area was seeing little or no growth. Now whilst the media may ignore it in the melee it is significant. Will there be less trade looking ahead? Also in such an environment relying on a trade surplus is awkward as you struggle for customers. The stereotype here is German car sales as we remind ourselves that the surplus is mostly a German thing. Here we return to one of the subjects of Friday via the price of Nutella which again hinted as the size of the devaluation given to Germany via its retiring of the Deutschemark and replacement of it with the Euro.
The breakdown of the changes over the past year is curious.
This decline was mainly driven by a reduction in the surpluses for services (down from €99 billion to €31 billion) and primary income (down from €89 billion to €69 billion). These developments were partly offset by a larger surplus for goods (up from €289 billion to €317 billion) and a smaller deficit for secondary income (down from €159 billion to €152 billion).
These numbers come with problems as in my opinion they will have no idea about secondary income and little about primary income. Also they ignore the big player here which is trade in goods and I note it is ignored above. In reality we see a fall in exports from 20.3% to 19.4% of GDP and a fall in imports from 17.9% to 16.4% both of which signal trouble.
If we look at May and compare with last year we see a fall in the goods surplus from 24.6 billion to 17 billion Euros. To my mind that is much more significant than looking at much more minor services numbers which have an odd increase in services imports.
A completely different perspective is provided by the UK. The last time we had a surplus was around 1997/98 and as people read my output sometimes years later let me point out that it has been revised in and out. That gives us another perspective in that the revisions make clear we know much less than we think we do and adds a counterpoint to the certainty with which the numbers are presented. Of course another way of looking at all of this is the way the UK trade release is hidden by issuing it on the same day as GDP and other major figures are announced. So using the military dictum of hiding something in plain sight, or it you prefer lifting it straight out of the playbook of Sir Humphrey Appleby from Yes Prime Minister.
As to May we were told this.
The total trade balance, excluding non-monetary gold and other precious metals, decreased by £5.2 billion to a deficit of £1.7 billion in the three months to May 2020, as exports fell by £47.7 billion and imports fell by a lesser £42.6 billion.
Even the shake down of the pandemic could not give us a surplus and as I pointed out above it is a case of “same as it ever was, same as it ever was”.
The total trade deficit (goods and services), excluding non-monetary gold and other precious metals, narrowed by £28.8 billion to £5.5 billion in the 12 months to May 2020, as imports fell by £59.3 and exports fell by a lesser £30.5 billion.
If we look further we see that we are told it is a services game just like in the Euro area.
The trade in services surplus narrowed by £6.5 billion to £22.1 billion in the three months to May 2020 . Services exports fell by £28.7 billion to £54.2 billion, while services imports fell by £22.2 billion to £32.0 billion.
Really? I doubt we have any real idea what has happened to services trade apart from knowing it has declined. However the UK does at least note some ch-ch-changes for goods trade.
The trade in goods deficit, excluding precious metals, narrowed by £1.3 billion to £23.8 billion in the three months to May 2020. Goods imports fell by £20.3 billion to £90.1 billion, while goods exports fell by £19.0 billion to £66.3 billion.
Again the major news I think is the fall in both imports and exports. Also there is a bit of a contradiction because the Euro area reported a larger goods surplus over the past year which does not fit with what the UK is reporting.
Falling good imports from EU countries were largely seen in machinery and transport equipment and miscellaneous manufactures, which fell by £7.9 billion (34.4%) and £1.8 billion (24.2%) respectively.
I know the Euro area exports to the rest of the world and that these are quarterly and not annual figures, but none the less.
Returning to the UK there is evidence here for a flow out of the UK Pound via the trade deficit. On that subject as they are rare beasts let me gratuitously quote a UK trade surplus.
Including precious metals, the total trade surplus decreased by £7.0 billion to £2.7 billion in the three months to May 2020, driven by a narrowing of the trade in services surplus.
Make of that what you will as I also note this.
while the falls in exports of miscellaneous manufactures were largely seen in other manufactures and works of art.
Trade has become a big deal over the past eighteen months, ironically as its growth declined and then reversed. The simple pronoucement is Euro area surplus good and UK deficit bad but there are nuances. The surplus makes the Euro area more vulnerable in times of decline and I have written many times that the main area of UK strength which is services is measured woefully. The release has 22 breakdown tables for geography and product but all such details are for goods not services. Essentially this is because they have little or no idea. I have long argued that the UK services trade position is likely to be much better than we think but it is also true I do not know that.
Next comes the issue of a combination of ch-ch-changes and a hard rains gonna fall as I note this example from Reuters this morning.
Anywhere but there. Japan is following through on its plan to encourage some companies to reshore production from China, starting with makers of facemasks…….n addition, 30 companies are being paid to move out of China into Southeast Asia, including Vietnam, where labour costs are lower. A shift to these neighbouring countries sounds more realistic.
Let me finish by pointing out the UK trade figures are not the same as the current account but as I have already pointed out secondary income figures and the like are only accurate by fluke.