Sunday, September 23, 2012

Eurozone crisis has eliminated the periphery trade deficit

The Eurozone recession is having a somewhat unexpected effect on the periphery nations' current accounts. As was the case with Portugal (see this discussion), the Eurozone periphery has eliminated its trade deficit.

Source: CS

Domestic demand in these nations has collapsed, dramatically shrinking imports and improving the external balance. These nations just can't afford many of the goods they used to import. And as the periphery eliminated its trade deficit, the Eurozone as a whole went into a trade surplus.

Source: CS

This improvement to the area's current account balance was at the expense of a massive GDP reduction, negatively impacting global economic growth.
CS: - We think that sharp, crisis-induced, rise in the euro area’s current account balance – worth around two percentage points of euro area GDP in the past nine months – has generated a significant negative shock to the global economy.
This is one of the reasons the UK for example is struggling with a rising trade deficit (see this discussion) and a double-dip recession. Spain, Italy, Portugal, Ireland, etc. are no longer in a position to be buying British and other nations' products and services as they did in the past.
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