Wednesday, 16 February 2011

Trends in European External Trade

Here’s another relatively quick post. I hope you don’t think that the quality of the posts is in free fall, but if you do please post a comment and say so.

I was looking at European external trade data and was curious to see if any patterns emerged. Well ,one or two certainly did.

Since external trade volumes have jumped over time, there is no point in calculating the nominal trade balance (besides the fact that these are nominal data). In order to overcome this slight difficulty, I calculated the ratio of exports to imports, which should be enough to display any trends in the relationship of the two. Here’s the chart.

source: ECB - Eurostat

A first trend that emerges is that since the crisis European exports to Emerging Markets (EMs) have posted a notable increase.  This is valid for China, Asia as a whole and Latin America.

The same goes for the USA, while European exports to the UK have been essentially flat over the past 5 years or so.

One fact that explains part of these trends is the devaluation of the Euro against the US dollar. Since China has an explicit peg with the USD and most export-oriented Asian economies have implicit pegs with the USD (meaning that they are trying to prevent their currencies from appreciating against it) this means that European exports became relatively cheaper.

But the Euro’s decline relative to the USD cannot probably be the sole reason behind this. Consumption in these countries must have picked up a bit, since they were not that hardly hit by the crisis (at least until now, but let’s see what the future holds).

All in all, it seems that Europe did manage to remain more competitive than other developed economies, namely USA and the UK. Now that private consumption seems to be on the rise in EMs, imports from Europe appear to spike upwards, assisted by the Euro’s relative decline against the USD (at least in the first half of 2010, because in the second half of the year it did appreciate a bit).

I don’t know if the rise in private consumption in EMs is sustainable in the short-term or medium - term,  since things worldwide are slightly complicated at the moment. Consumer price inflation is on the rise and nobody can rule out some kind of crisis in the EMs or in the Developed Markets (I don’t want to get more specific about this) but for the time being this is the way things stand in European external trade…

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