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- EUR slips after trade balance data shows economy limping into year-end.
- But Destatis data suggests Germany avoided recession, economists say.
- Still, the growth outlook is darkening and risks are to the downside.
The Euro slipped lower Tuesday after trade balance data for November painted a picture of a continental economy that limped into year-end, although economists are now saying that Germany may have narrowly avoided a so-called technical recession last year.
The Eurozone's trade surplus widened to €15.1 billion in November€15.1 billion in November, from an upwardly-revised €13.5 billion previously, although the positive headline was the result of imports having fallen faster than exports during the month and not because of some pick-up in demand for Euro area goods from the rest of the world.
Exports from Europe fell by -1% to €192.1 bn during November and imports declined by an even larger -1.9%, to €177 bn. Economists say November's fall in the price of oil made a significant contribution to the weaker import number, but that a fall in "net trade" for France and Italy was also at play.
"We suspect the crash in oil prices was the main driver, reducing the nominal value of imports," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics. "The net export contribution to GDP growth in the Eurozone has slumped in the past 12 months, but we suspect the trend stabilised in Q4, with net trade being neutral. The risks are tilted to the downside though."
Trade balance data measures the difference in value between a nation's imports and its exports. Currency markets care about it because the data provides insight into supply and demand of a currency in the "real economy", while also giving a steer on the likely pace of GDP growth in a given period.
The size and trajectory of a trade surplus or deficit is important for economic growth because imports are a subtraction in the calculation of GDP, while exports represent a credit to the value of economic output. As a result, rising exports and, or, falling imports can help boost an economy.
Tuesday's trade balance follows a series of dire industrial production numbers for Germany, France, Italy and the wider Eurozone, which have suggested strongly that the continental economy did not rebound from its third-quarter slump during the final momths of the year.
"We have to brace ourselves for a very grey winter. Although some snap-back in car and chemicals output should boost Q1 GDP a little, the underlying tone in German and Eurozone data will likely be very soft. The risks to our below-consensus forecast of 1.2% German – and Eurozone – GDP growth for 2019 are heavily tilted to the downside," warns Holger Schmeiding, chief economist at Berenberg Bank.
Above: Euro-to-Dollar rate shown at daily intervals.
The Euro-to-Dollar rate was quoted -0.37% lower at 1.1430 during the morning session Tuesday and has fallen -0.31% this year, while the Euro-to-Pound rate was -0.07% lower at 0.8903 and has declined -1% thus far in 2019.
Above: Euro-to-Pound rate shown at daily intervals.
A -0.2% contraction in the third quarter and subsequent steep falls in industrial production, as well as the German economy's sensitivity to events in China, have had economists increasingly flagging the possibility that the economy fell into recession at the end of last year. The Chinese economy is creaking after having been clobbered by President Donald Trump's trade tariffs last year.
However, Destatis said Tuesday the German economy likely grew by 1.5% in 2018, down from 2.2% in 2017. Domestic demand was the greatest contributor to growth last year, as external demand faltered in the face of the U.S.-China tariff fight and a litany of other challenges.
The number is preliminary and subject to change given its based on incomplete data. Final quarter GDP data scheduled for release on February 14 will have the final word on whether the economy entered or avoided recession.
"The preliminary estimate of GDP for 2018, and comments by the Federal Statistics Office, suggest that Germany narrowly avoided a recession last year. But this is of limited comfort: the bigger picture is that, having slowed sharply last year, Germany’s economy is likely to remain weak this year," says Andrew Kennigham, chief Europe economist at Capital Economics.
Some economists, including those at Bank of America, have also said in recent days that Italy's economy could have entered recession during the final months of last year too. And growth across other parts of the bloc has also faltered.
This is darkening the outlook for European Central Bank (ECB) monetary policy, which matters for the Euro because the single currency's recent appeal to investors has been contingent upon the idea the central bank will lift its interest rate from record low levels once "through the summer of 2019".
However, the Eurozone needed growth to remain at or close to 2017's elevated level in order to support a return of inflation toward its target of "close to but below 2%". This recovery of inflation now looks unlikely to happen in the short term, which has encouraged markets and economists to speculate the ECB will now not raise interest rates at all in 2019 or 2020.
"With underlying inflation a long way short of its close-to-2% target, the ECB is unlikely to raise policy rates at all this year or next, and will thus miss out entirely on the global tightening cycle. This would leave the ECB looking similar to the Bank of Japan," Kenningham writes, in a recent note to clients.
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