I was on a conference call with a colleague yesterday discussing the state of trade for UK manufacturers. The discussion turned to why the German economy seems to be doing better than the UK. Germany recorded a post-unification high of 2.2% growth q/q in 2010 Q2, largely on the back of a strong exporting performance.
My colleague noted recent comments from the Bank of England’s Charlie Bean that Germany exported more capital goods relative to the UK. Strong Chinese demand for German goods like ventilators, electric motors, fridges, dryers, and cars is a key part of the German export performance. So much so in fact that some commentators have been wondering whether Germany might be becoming too reliant on China given some talk of slowing in the world's second largest economy.
This got me thinking about a number of articles in the media recently about German exports to China, the Chinese economy generally, and whether boosting exports to the Far East is a sustainable strategy for the West to return to solid growth.
So looking a little closer at what’s happened recently, I see that Germany’s surging exports to China, smashed on at an annual growth rate of over 30% . But German exports still focus predominantly on Europe, even more than the UK.
Indeed Germany still exports roughly three quarters of its goods within Europe – far more than the c14% that goes to Asia . So the Chinese story is more about growth of exports. Though it should be noted that exports in June were up 22% on June 2009 for EU countries, so growing well, even if short of the 37% increase to countries outside the EU.
How does this compare to the UK? Well in 2009 the UK sent just 2% of its exports to China , certainly less than Germany’s 4.5%. In terms of growth, exports to China were among the few UK export locations that saw an increase in the 2009/10 year, after trade took a hammering following the financial crisis. Bar 2009, year-on-year growth of exports to China has been in the double digits but no evidence I've seen so far suggesting growth as strong as Germany's. The sorts of things that are exported include medicine, petrol, engines/motors, and cars so not a perfect fit with the Charlie Bean capital goods v consumer goods explanation.
I think there’s more to it.
Why do the Germans seem to have an export-powered growth advantage over the UK at a time when the £ has depreciated by c25%, supposedly making our exports more competitive?
One important comparison to bear in mind is that Germany is simply a bigger exporter than the UK. In 2008 the UK’s exports were worth a bit over quarter of its GDP – but the Germans were 20pp higher, at 47%. In terms of net position, the UK has lately found itself in deficit, whereas the Germans are consistently in surplus - that is, contributing to overall growth.
So in 2009 when the recession shrank the UK and German economies by 4.9%, there was an even bigger drop in trade of 25%. The steeper decline in trade is mirrored now by a steeper rise, as trade in goods in particular trade rebounds. The pattern of growth follows this structural difference. Perhaps the bigger mystery following this logic is not why Germany is growing faster now but why Germany didn't drop further during the recession, as Japan for example did.
Perhaps it's not a question of the UK doing badly at all. It posted 1.1% growth q/q in Q2, better than almost all predictions and better than almost all developed countries (except the Germans of course). Though in our case trade wasn't the engine of growth and it is a puzzle that exports are not growing more strongly, given the depreciation in sterling. This is a puzzle that is both perplexing now and important for the longer term, as many see the expansion of exports as a key part of the rebalancing act the UK economy needs to drive its future growth.
This is a good overall performance, though likely a local peak for growth in the short term. For exports, particularly to places like China, another important difference between the UK and, say, Germany is our higher focus on services - I think that's more important than consumer v capital goods differences. Although we exported 2.4% of our goods to China in 2009, only 1.45% of our services exports went there and within those just 0.5% of our financial services exports and 0.9% of other business service exports. China has a lack of demand for UK service exports.
All this leaves me feeling that more is certainly possible. Apart from our German friends, Europe – our major export location – is growing only weakly. Emerging markets have long been identified as the future for UK exports and yet our presence in places like China is still small. A rebalanced economy needs to see net trade helping drive overall growth – far from the drag it currently represents - and that is going to need higher exports to places like China.
In my view the opportunities from putting more effort into China far outweigh the risks. In the medium term, the outlook for the Chinese economy is very strong. Growth is forecast to be closer to 10% than 5% for both this year and next. There is external pressure for a revaluation of the yuan and internal pressure for higher wages. Both of these pressures are likely to lead to higher demand for consumer goods – and potentially services – benefitting the UK. And the terms of trade would tilt to better favour our exports.
I still feel there’s more to understand here. Why aren’t exports growing more strongly and what more could be done? Are there any differences with Germany that we could learn from? When, if ever, are we going to get a proper kick from the sterling depreciation?