Germany: Massive current account surplus set to decline

Research Team at Deutsche Bank, suggests that the Eurozone’s current account surplus has lent some support to the euro over the past two years at a time of relentless fixed income outflows.

Key Quotes

“Germany is pivotal, as it accounts for 60% of the surplus. This report argues that the German surplus is likely to weaken by about 20% to 7% of GDP by the end of the decade.

Since the rotation of fixed income assets out of Europe is likely to continue – a dynamic we have referred to as ‘Euroglut’ – the balance of payments should therefore become even more bearish for the euro.

Unfavourable demographic trends and the domestic housing boom will be most detrimental to the surplus. Both factors will lower household saving ratios and are likely to result in higher import demand. As a new factor to this mix, record levels of immigration will accelerate the decline. Directly, it will raise import demand for foreign goods as well as remittances into home countries. Indirectly, the integration in the housing market is likely to cement excess demand for years to come and help drive real estate prices higher.

Externally, accelerating global growth relative to Germany’s cycle will benefit net export demand, but the net effect will be limited by the fact that global trade will probably remain subdued. The aftermath of ‘Brexit’ and weak demand from oil-exporting economies are particularly concerning for German exporters.

While our results are model-driven, we also provide deep dives into the main drivers of the German current account: the housing market, international trade and demographic change, including migration.”

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