Recent weakness in Germany and other “core” Eurozone economies was signalled by a contraction in real narrow money in late 2010 and the first half of 2011, discussed in various posts last year, e.g. here. Core real money growth, however, has recovered in 2012, with Germany in the lead. The country’s exporters, meanwhile, will benefit from the slide in the euro versus the yen and a likely revival in emerging-world growth in 2013.
The first chart shows six-month changes in German industrial output and real M1 deposits (i.e. overnight deposits). Real deposits grew by 4.3%, or 8.8% annualised, in the six months to June – the fastest growth since September 2010. The July cut in the ECB’s refinancing and deposit rates, and likely further easing actions, may sustain this pick-up.
The second chart shows the net percentage of firms expecting higher exports together with the yen / euro exchange rate*, plotted inverted (i.e. a rise in the line indicates a cheaper euro). Export expectations have weakened significantly as the global economy has slowed since early 2011 but the balance, nonetheless, remains positive. This may partly reflect German companies gaining market share at the expense of Japanese competitors – the exchange rate versus the yen is the weakest since 2000. German exporters look well-placed to benefit from a recovery in global economic momentum from late 2012 suggested by real money trends – see Wednesday’s post.
Germany is more sensitive than most other major economies to emerging-world growth: Asia ex. Japan and Eastern Europe account for a combined 22% of total goods exports, in turn equal to 9.0% of GDP – the equivalent proportion for the UK is only 2.2%. This year’s emerging-world slowdown has been a drag on German economic performance but E7 real narrow money expansion has started to revive, suggesting improving prospects for 2013 – third chart.
A buoyant German economy next year would be good news for the wider Eurozone – providing the ECB sets monetary policy for the whole group rather than its leading member. Former ECB President Trichet caved to Bundesbank pressure for ill-advised monetary tightening following the 2009-10 economic upswing; based on his actions to date, Sig. Draghi is unlikely to make the same mistake.
*The rate is linked to the DM before EMU’s inception in 1999.
