Over the past few decades there has been a great deal of focus on the large trade imbalance between the US and Asia - first with Japan and more recently with China. While that is still an issue, we may be facing a new imbalance that is starting to grab the attention of politicians, economists, and the markets. The chart below shows the current account balance as a percentage of each nation's GDP. And one nation clearly stands out - Germany.
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| Source: Tradingeconomics.com, Merrill Lynch |
According to Merrill Lynch the massive German current account surplus will manifest itself in two major ways:
1. It is bound to generate friction within the Eurozone, particularly as German assets appreciate, while the periphery is experiencing deflationary pressures.
Merrill: - Germany’s surplus holds a deeper meaning for financial markets in 2014. First, it signifies the difficulty faced by ECB monetary policy. It should not be easy to achieve a balance between Germany with its growing current account surplus and where real-estate prices have started turning up [see Twitter chart from the ECB], and the periphery countries that are facing disinflation despite having somewhat reduced their current account deficits as a tradeoff for low growth. Whether it happens in 2014 or not, eurozone fiscal policy discussions will be necessary at some point, though politically difficult. Eurozone financial issues could still destabilize global financial markets at some point in the future.2. This imbalance is likely to have an impact on the currency markets, especially with respect to the yen.
Merrill: - The second implication is for the exchange rate issue with Japan. While Germany’s current account surplus has expanded, it is Japan’s current account that has deteriorated sharply. Comparing Japan’s balance of trade in 2010 and 2013 (Jan- Nov for both years), reveals that it has fallen by ¥16.1tn (3.2% of GDP). Around half (¥7.5tn) of this is in non-energy trade. Of that ¥7.5tn, more than ¥2tn is due to trade with the EU, and the rest is versus Asia. Japan is expected to post a ¥11-12tn (1.2- 1.4% of GDP) trade deficit for 2013. Although its income balance will keep the current account positive, the surplus will likely be less than 1% of GDP.2014 should see an increased focus on this topic, as Germany's current account surplus continues to stand out.
...the change in current account imbalances seems consistent with our FX strategy team’s projection that the leeway for a rebound in the JPY is relatively limited versus the EUR, and the JPY should continue to weaken versus USD in 2014.
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