The German current account surplus: Much larger than officially reported?
It appears the German government is manipulating its trade surplus statistics to avoid increased criticism. While Germans believe a massive trade surplus is a confirmation of national superiority, elsewhere it is termed “beggaring thy neighbour”. The losers are not only the rest of the world, but also German workers, who go underpaid to maintain a trading advantage, thus not enjoying the full fruits of their labour.
Statistics are not nearly as reliable as they seem. According to figures from the German Bundesbank, the German current account surplus in 2017 may have been far higher in real terms than was reported by the German Statistical Office – with severe consequences for assessing the role of domestic demand in the growth of the German economy.
A few days ago, the German Statistical Office published its first results for the National Accounts for 2017. In presenting the results, the Office emphasised that the upturn in the German economy (adjusted for price increases of 2.2 percent) was not, as many critics claim, primarily driven by exports, but that the domestic market, i.e. consumption and investment, had been the major driving force in the past year. Admittedly, the price-adjusted exports of goods and services were 4.7 percent higher than in the previous year. However, imports would have grown more strongly in the same period (+ 5.2 percent). “The resulting external trade balance, i.e. the difference between exports and imports, made a purely arithmetical contribution of 0.2 percentage points to GDP growth.” This is only a small part of total growth.
If you take a look at the statistics of the Deutsche Bundesbank parallel to these figures, the seeds of doubt are sown. The Bundesbank also publishes data on foreign trade. For the first three quarters of 2017, the price-adjusted balance of foreign trade in goods (i.e. the volume of exported goods minus the volume of imported goods adjusted for price changes) is essentially higher than in the first three quarters of 2016, i.e. around € 21 billion higher in each quarter. The monthly values for October and November in nominal and, as far as available, in real terms also indicate that the price-adjusted balance in the fourth quarter of 2017 will probably have exceeded the corresponding figure from the previous year by a similar order of magnitude. How does this fit in with the rather small contribution to growth that the German Statistical Office calculates for foreign trade?
Criticism of surpluses
From a political point of view, Germany’s high net exports are a hot potato, since Germany’s surpluses are criticised internationally. It is therefore worth taking a closer look at these figures.
In the public eye, the results of the calculations of the German Statistics Office are predominantly interpreted as primary statistics, i.e. there would seem little reason to doubt them. But that is a fallacy. Here, the Statistical Office is teetering on the dividing line between pure statistics and an economic perspective. Such a calculation (especially using such provisional data) cannot be carried out without a considerable number of estimates that allow substantial leeway for subjectively or politically coloured interpretations on a case-by-case basis.
It seems that there is room for manoeuvre here, and it is hard to understand why the statisticians did not point this out when presenting the figures to the public. It is also rather incredible that obvious differences between the statistics of the German Statistical Office and the Bundesbank are not taken as an opportunity to stimulate a discussion in the scientific community on how these results are ascertained and on the economic significance of the discrepancies.
In the run-up to publishing this article, we asked the Office for Statistics and the Bundesbank to give us an explanation for the enormous discrepancies in the price adjustment of foreign trade (which is the main issue) or at least to help us evaluate it economically. Unfortunately, the answers were ambivalent at best. Reference is made to the conventions of national accounts and possible revisions of the figures at a later date. In the interests of greater transparency in future we need to expose the current inconsistencies.
Price and volume effects
The Deutsche Bundesbank wrote the following in an article on balance-of-payments developments in 2016 in the Monthly Report of March 2017 with regard to the current account balance in 2016 and the expected development of the German current account balance in 2017:
“The current account surplus of the German economy, measured in terms of nominal gross domestic product (GDP), fell slightly in 2016 to 8.25 percent. The annual average decline conceals a more pronounced reduction in the course of the year…. If there is no reversal of the trend in relative prices, there is much to suggest that Germany’s current account surplus will decline markedly on an annual average in the current year”.
In order to explain the continuing high surplus in 2016 (€261.4 billion, compared with €260.0 billion in 2015, see ibid. p. 27), the text referred to the price development of imported goods:
“With regard to the partial balances, it should be noted that the surplus in trade in goods continued to increase, although this was due to lower import prices for the fourth consecutive year. In terms of value, this price effect obscures the quantitative reduction of the surplus in goods trading.”
We now see that the current account surplus for 2017 has developed differently than the Bundesbank had assumed in March 2017: It has not decreased noticeably. The German Statistical Office, for example, stated in its report on the development of important macroeconomic aggregates a few days ago:
“Germany again achieved an export surplus in 2017: Net exports at current prices reached a value of around 248 billion euros. Compared with the previous year, nominal net exports are slightly [sic!] down by just under 2.5 billion euros.”
(The nominal net exports are a measure derived from national accounts and, with the exception of a few differences in definition, are comparable with the current account surplus from the Bundesbank’s balance of payments statistics).
In addition, official statistics on foreign trade prices show that the reversal of the trend in relative prices in 2017, which the Bundesbank referred to as limiting the accuracy of its forecast, has indeed not happened. The trend in relative prices that emerged at the end of 2016 and the beginning of 2017 has not reversed but rather increased: the terms of trade (i. e. the “relative prices” that are essential for foreign trade, i. e. the ratio of import to export prices) have worsened for Germany. This was confirmed by the German Statistical Office:
“In 2017, both export and import prices (according to national accounts concepts) have risen. At 2.6 percent, the increase in import prices was stronger than export prices, which were 1.6 percent higher than in the previous year. This means that the terms of trade have deteriorated for the first time since 2012 (by one percentage point).
In other words, the Bundesbank’s expectations with regard to the fall in the current account surplus in 2017 have been contradicted by the actual outcome. After all, if imports in relation to exports have become even more expensive than initially assumed (particularly for crude oil and other raw materials), nominal imports should have risen more strongly than nominal exports by the same amount, which would have reduced the nominal trade balance significantly in purely arithmetical terms.
This did not happen, however, and Germany’s surpluses have remained at an extremely high level in nominal terms, according to figures known for a long time. The German Council of Economic Experts (SVR) and the economic research institutes have also stated in their recent calculations that the German current account surplus has fallen only marginally. The ifo Institute has meanwhile corrected this calculation and expects a significantly higher surplus for 2017 than in 2016. According to the Bundesbank, the German current account balance for January 2017 up to and including November was only insignificantly lower (227 versus 234 billion euros) than in the previous year.
For logical reasons, therefore, there must have been a change in the quantities: either the import volumes have noticeably decreased or the export volumes have risen more sharply, or a mixture of both. The Bundesbank’s March 2017 claim quoted above with regard to the development of the 2016 balance in view of the improvement in terms of trade at that time (“This price effect obscures the reduction in the volume of surplus in goods trading in terms of value.”) turned out to be exactly the opposite: “This price effect – i. e. the deterioration in terms of trade – obscures, when one considers the terms of value, the increase in the quantity of surplus in goods.”
How high is the real surplus?
If the real surplus is much higher than currently shown in the national accounts, then the interpretation of German economic growth is a nonsense, whichever source you use: the German Statistical Office, the SVR or the economic institutes. Ergo, it is simply incorrect to assume that consumption and investment are the pillars of the economy. According to all estimates, real GDP increased by some 60 to 70 billion euros last year. If the real surplus in trade in goods, as the statistics of the Bundesbank suggest, has increased by 80 billion, then the contribution of all internal divisions must have been negative.
80 billion more?
In its seasonally adjusted economic statistics the Bundesbank actually shows sharply declining real imports (see Figure 1, an excerpt from the original chart).
Figure 1: trade, export and import.
It follows from this, in turn, that the real surplus in foreign trade will increase significantly in 2017 compared with 2016, by an incredible €60 billion in the first three quarters of the year, i. e. extrapolated by €80 billion per year, as shown in the Bundesbank’s original table (cf. the fourth column from the right in the following figure 2: Foreign trade, balance, volume = Außenhandel, Saldo, Volumen).
Figure 2: Foreign Trade – Trade in goods and its components
Real imports (volume) declined in each quarter compared to 2016 and the volume balance increased in each of the three quarters for which data are available to date. If these figures are only halfway correct, then the statement that the German economy was driven by domestic demand is wrong. Whatever the reasons for the discrepancy in the calculation of the real trade surplus, there is evidently room for wide interpretation of the seemingly clear calculation of the German Statistical Office. It is extremely important to point this out, as these figures are not discussed seriously in the German media or among German economists.
Where does this discrepancy come from?
The discrepancy is largely explained by the fact that the German Statistical Office uses price indices for imports and exports in its real calculation, while the Bundesbank uses the so-called average import and export values in the above-mentioned calculation.
There is no clear evidence that one or the other measure of price movements in foreign trade provides correct or incorrect results at all times. The average values are more common internationally and are also representative, since they cover a much larger group of goods. There is also some evidence to suggest that, in the case of one-off events such as a sharp rise in oil prices, the Paasche Index of averages outperforms the Laspeyres Index, which is commonly used by the German Statistical Office. In the past, as can be seen from a study conducted by the German Statistical Office, both of them, however, usually ran pretty much in parallel.
However, it is hardly plausible in the case of 2017 that the large increases in the import price of oil and other raw materials, which are undisputed and well documented have had as little effect on foreign trade as the Statistical Office, the institutes and the SVR implicitly assume. In the first quarter, oil prices in the high double-digit range were higher than in the previous year, while other raw materials had also become very expensive.
Figure 3: Prices
The Statistical Office’s estimate of the import prices (i. e. the indices) for 2017 is therefore incomprehensible. Accordingly these have only risen by 2.6 percent in the national accounts in 2017 as a whole. This figure was also adopted by most forecasters (at the economic institutes it was only 2.4 percent). However, the growth rates of the indices for goods in the balance of payments statistics already show an average increase of 3.9 percent. In addition, there are services, which are calculated with a lower weight. How that 2.6 percent in the national accounts has been calculated remains one of the Statistical Office’s best-kept secrets. It is clear, however, that with increases in import prices in the order of 4 percent, the real surplus in foreign trade and thus the net exports in national accounts would have been much higher. Not to mention what would have resulted if the 15 percent increase in average values had been taken as a basis for calculating the import prices.
Failed public relations
Overall, the position of the German Statistical Office and its communications policy is a source of concern. The minimum that must be demanded of such an authority is the disclosure of methodological difficulties, coupled with an invitation to experts to discuss the result in public, rather than sweeping it under the carpet without comment.
The 80 billion euros more in real surplus resulting from the Bundesbank’s accounts may sound extreme and will be revised downwards in the wake of the usual revisions in the coming months. But if we take only half, that is to say, 40 billion euros, that still demands dramatic changes in how we interpret the performance of Germany’s domestic economy last year. It becomes impossible to talk about an economic cycle that is essentially driven by domestic demand. It would be more accurate to talk about an expansion of German mercantilism and more severe violations of the principles of free trade. It should not be forgotten that even a constant surplus, or even a 20 billion euro fall in the surplus, still means an actual surplus of well over 200 billion euros. That is the level at which rest of the world’s indebtedness to Germany is increasing every year. That is the level at which German workers, together with their families and the state, produce more than they consume. If we wanted to put an end to this imbalance, we would have to close a gap of over 200 billion euros with additional domestic demand.