Euroland: A Quarter of Foreign Trade has Evaporated

• Foreign trade data for April was somewhat disappointing, though not a complete surprise. Exports have been in a stabilisation phase since February after having been in freefall.
• We project that exports will start to increase in the coming months. The improvement in exports will be driven by Asia, where we currently see strong signs of a rebound.
• Imports might also start to increase soon, but to begin with we look for a stabilisation as domestic demand in the euro area is still very weak.
• Trade with Eastern Europe has been hit particularly hard. There are signs of stabilisation or even a recovery in Eastern Europe, which will be a relief for Euroland, but risks remain high.

Details

A quarter of the euro area's exports has evaporated - and imports have suffered the same fate. Today's trade data indicates that although we have seen stabilisation at a low level, the crisis is not over. There is a very long way to go before world trade is back at normal levels.

Euroland exports declined 1.3% in April and are now 24.3% lower than a year ago. Imports fell as much as 2.7% and are also precisely 24.3%. The trade data for April was somewhat disappointing, since small increases in both imports and exports in March had given hopes that a rebound was about to begin. We did get rather bad trade data from Germany last week (exports dropped 4.8% m/m), so today's poor data was not a complete surprise. Germany - the world's largest exporter - has been hit particularly hard by the crisis because of a pro-cyclical export mix with an abundance of investment goods and motor vehicles. We believe that exports have been in a stabilisation phase since February after having been in freefall.

The trade surplus increased to EUR2.7bn from EUR1.8bn in March and is slightly higher than April last year (EUR2.2bn).

Assessment and expectations

We project that exports will start to increase in the coming months. This would be in line with the modest rebound we have seen in German manufacturing non-euro area export orders. The improvement in exports will be driven by Asia, where we currently see strong signs of a rebound. Indeed, exports to both China and the rest of Asia (excluding Japan) have increased quite sharply in the past three months. Exports to Japan only started to improve slightly in April. Asia accounts for approximately a fifth of Euroland exports.

Imports might soon start to increase too, but to begin with we look for a stabilisation as domestic demand in Euroland is still weak. Car sales indicate a rebound in domestic demand, but this is primarily driven by 'incentive programmes' in car-producing member states and should not be given too much emphasis, although it does lift imports from Asia.

It is in particular the trade with Eastern Europe that is hard hit. In the first four months of the year, exports to Russia declined 34% and imports from Russia fell as much as 41% compared with the same period last year (which is partly explained by the decline in energy prices). There are signs of stabilisation or even a recovery in Eastern Europe, which will certainly be a relief for Euroland, but risks in the region remain high with several countries currently in a very bad state. Eastern Europe accounts for slightly less than a fifth of Euroland exports.

Danske Bank
http://www.danskebank.com/danskeresearch

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