Posted by: Dirk | August 15, 2008

The j-curve: German imports in 2008

The following graph is taken from Deutsche Bundesbank. It shows:

year and month /  exports / – adjusted / imports / – adjusted / net / – adjusted

Now here’s the point: why are imports (blue) falling while exports (yellow) have been flat so far this year? Of course, a perfect co-movement of imports and exports is not to be expected. Still, Germany has a trade surplus with rest of the world, plus the euro is strong and should make imports relatively cheap. That should lead to an increase in imports. It seems that German consumer demand is faltering significantly. Or maybe imports are more cost-sensitive to rising transport costs?

The answer is probably: none of the above, but the simple application of the so-called j-curve. As a currency appreciates, imports get cheaper. Keeping the quantity of imports constant, the total bill for imports will decline. After some time, people will realize that imports are cheaper and start buying more of them. This leads to an increase in the total value of imports which should overcompensate the preceding drop. This is very likely the story that has unfolded so far. By the way: the price of oil has risen so far this year, so oil is probably not in the story. Declining demand might be part of the explanation, however. The next few months might bring new insights. Which reminds me of the new Business Cycle Clock by Eurostat. It’s a quarter to recession, isn’t it?

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