Germany woos China and Russia as eurozone falters

Fund Strategy - 25 July 2011 | By Stefanie Eschenbacher

But just days before, Merkel met Dmitri Medvedev, the Russian president, in Hannover. Medvedev brought 13 ministers and several secretaries of state along. At the centre of their discussions with Merkel were political and trade agreements that showed how important emerging markets have become for Germany.

During a three-country trip to Africa earlier this month, Merkel focused on trade and partnerships with Angola, Kenya and Nigeria. In June, she welcomed a Chinese delegation, led by Wen Jiabao, the Chinese prime minister.

While such visits are standard, the outcome of the last one was not. Russia and Germany are expected to have signed more than a dozen treaties during the meeting, although details have not yet been revealed.

Representatives from China and Germany signed 22 treaties, 14 of which were economic, worth more than €10 billion (£8.8 billion). (New analysis continues below)

In key industrial sectors, Germany’s trade ties with emerging countries like China and Russia are becoming tighter, while those with the eurozone countries are wavering.

Rolf Langhammer, a professor and vice president of the Kiel Institute for the World Economy, specialises in the effects of regional integration among emerging markets, third country effects of the European integration and reforms of the multilateral trading system. He says Germany’s relationship with countries outside the eurozone, such as China and Russia, is stronger.

“Emerging markets are growing faster than those in the eurozone and Germany produces just those capital and consumption goods fast-growing countries demand,” Langhammer says.

Eurozone countries are, combined, still Germany’s most important export market. Over the past decade, much of this has been shifted towards faster growing countries in eastern Europe. The importance of the eurozone as a whole, however, has declined in relative terms and is expected to do so further.

Data from the German Institute for Economic Research shows that the share of Germany’s exports that goes to China has more than tripled in the past decade, while the share of exports that goes to Russia has almost doubled.

Simon Junker, a research associate at the German Institute for Economic Research, says that China has grown in importance and has superseded other countries, including Russia.

Junker says many eurozone countries have had structural problems for some time, to which indebted firms and private households have contributed.

German exporters of machinery, electronic technology and machine tools have benefited in particular from this demand. “German export ­companies are benefiting from their presence in strong growing markets,” Junker says. “During the crisis they have gained market share.”

The Ifo Institute for Economic Research in Munich estimates that China has become the biggest exporter to Germany, while exports to China have also reached record highs.

Recent data from the International Monetary Fund (IMF) supports this research. According to the 2011 Article IV Consultation published earlier this month, Germany’s current account surplus reflects a positive trade balance, especially with other European countries.

Trade surpluses for goods have been the main driver of Germany’s current account, and the IMF says the country has not recorded a trade deficit in goods for the past 50 years.

“In recent years, the surplus with other European countries has risen, raising the concern with regard to intra-European imbalances,” the report warns. Yet the trade balance with China has widened in the past decade.

This reliance on international demand has risks. Gabriel Stein, the chief international economist at Lombard Street Research, wrote in a daily note published last week that a slowdown in China has hurt German manufacturers.

Using July’s monthly manufacturing statistics, Stein warns that growth may decelerate sharply in the third quarter of this year. “One likely cause is the slower activity in China, a hypothesis supported by the weak German manufacturing sales to the [non-eurozone] world,” he writes. “This is bad news for the autumn.”

Stein says German manufacturing has been particularly weak in July and, given the size of manufacturing in the country’s economy, as well as the importance of exports, this is a clear cause for concern.

Lombard Street Research has criticised Germany’s reliance on exports. However, it also forecast that Germany would be one of the last countries to recover from the economic slowdown.

Data suggests that the opposite has happened. Germany and France have shown unexpectedly strong growth that has outpaced that of both America and Britain, where the recovery has been much weaker. In the first quarter of this year, Germany’s economy grew 1.5%, reaching a level last seen in 2008.

Junker and Langhammer do not deny Germany’s dependence on exports for economic growth. Yet both expect Germany to pursue other emerging markets.

Meanwhile, global competition from those emerging markets is likely to increase and challenge Germany’s traditional dominance.

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