Euroland: Can exports ignore the euro?
Wed, Nov 14 2007, 10:06 GMT
by Niels-Henrik Bjørn
- The strengthening of the euro poses a serious risk to Euroland’s exports in 2008. However, it is worth recalling that the euro has not strengthened as much on a trade-weighed basis. Also, the more subdued development in unit labour costs will neutralise some of the competitiveness deterioration stemming from the stronger euro. Finally, large exposure to fast growing markets also supports exports.
- This means that Euroland is set to lose only a little of its share on export markets throughout 2008, and Euroland exports are thus set to grow only a little slower than global imports. Unless global trade falters one should not expect exports to drag down Euroland’s growth dramatically in 2008.
- Moderate export growth will be one of the key ingredients in assuring a soft landing for Euroland through 2008, as tight financing conditions and negative real wage growth will dampen the domestic economy further. Tight financing conditions will dampen Euroland’s business confidence gradually throughout most of 2008, but business confidence could easily rebound in the short term if sentiment effects related to the credit crisis fade.
- The strength in Euroland’s exports is primarily related to Germany. Germany’s export miracle over the past few years has mainly been driven by cost improvements. Germany will continue to outperform the rest of Euroland also during 2008.
- Moderate export growth could keep the ECB sidelined for a long time. On a 3-6 month horizon risks are still skewed towards further rate hikes, as global industry could push up business confidence. However, on a 12-month horizon they may start to be skewed towards rate cuts if the credit crisis continues and if the US economy keeps on posting only moderate growth.
