Posted by: Dirk | May 11, 2011

The 2011 return of the global imbalances

This week, news were spreading that both Germany and China had reached respective export records. Here is the news on Germany, reported by the BBC:

The country’s exports for the month totalled 98.3bn euros ($142bn; £87bn), 7.3% higher than February.

Its imports also reached an all-time high, up 3.1% to 79.4bn euros. Both imports and exports are the most since data started to be collected in 1950.

Germany is the world’s second-largest exporter.

At the same time, on the other side of the planet, the largest exporter also had ‘good’ news to report (source: NY Times):

China’s exports surged last month to a record level, as Chinese factories appear to have passed on rising costs to buyers who are finding that they have few alternatives in other countries.

China’s imports lagged, causing its trade surplus to widen sharply from the first three months of this year, to $11.43 billion. That was lower than last year, but still high enough to increase trade frictions with the United States and other countries worried that China is using a weak currency to claim an unusually large share of global job creation as the world economy climbs out of the recent economic downturn.

Let me add that at least in Germany the current account surplus is shrinking slightly, which still implies that exports are above imports. Exports into the euro zone are growing strongly, more so than to other destinations. A golden decade is in the making, experts say, according to the DIE ZEIT. It is not mentioned who these experts are, and I would guess that they are not academics.

It is already clear that inflation in Germany is rising, so the advantages of the past will be eaten up by a higher price level in Germany. Apparently, the strong euro is not a problem, which is interesting. In the past, export firms used to complain a lot when the euro was strong. Not this time. German net exports will translate into an increase in holdings of foreign assets, which has caused the recent financial crisis. Taking up this system again will, I believe, only lead to another bubble and then a crisis which probably will ruin all balance sheets. Trust in governments, central banks and financial institutions is low, and there will be no bail-out with the levels of sovereign debt of today.

Goods news for the world economy would be exports rising strongly in the European periphery and the US, so that these countries can run current account surpluses to repay foreign debt. As it stands, this is not in the making. However, in the long run the price level in China and Germany will adjust upwards in the long run, given that governments stop tinkering with their policy interventions to lower their respective labour costs.

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