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Germany displaces China as US Treasury's currency villain
( From Telegraph, Economics Help, Statistic Canada )

The US Treasury has issued a damning criticism of Germany’s chronic trade surplus in its annual report on worldwide exchange rate abuse, although it stopped short of labelling the country a currency manipulator.

Report to Congress on International Economic and Exchange Rate Policies
​​Treasury officials told Congress that internal balances within the eurozone are disrupting the global trade structure, with almost nothing being done by north Europeans states to curb their huge surpluses.

The report said Germany’s current account surplus is running at 6.3pc of GDP, and Holland is even worse at 9.5pc. Yet the countries still cleave to fiscal austerity policies that constrict internal demand.

The EU’s new tool for cracking down on intra-EMU imbalances is "asymmetric" and does not give "sufficient attention to countries with large and sustained external surpluses like Germany".

While the eurozone as a whole is roughly in trade balance, the EMU regime of austerity in the South without offsetting stimulus in the North is creating a contractinary bias, holding back global recovery.

The US Treasury said eurozone surplus states have "available room" for fiscal stimulus but refuse to act, despite repeated pledges by EU leaders that more must be done to foster growth. "They have not yet made any concrete proposals capable of yielding meaningful near-term results."

Germany's permanent surplus is in stark contrast to the shift under way in Asia. China has "partially succeeded in shifting away from a reliance on exports for growth", and has slashed its surplus to 2.6pc from 10.1pc in 2007.

While the yuan remains "significantly overvalued", China’s has stopped building reserves to hold down its currency and has seen a 40pc appreciation against the dollar since 2005 in real terms. Double-digit wage growth is closing thecurrency gap by oither means.

A chart published in the report shows that Germany has overtaken China to become the biggest single source of global trade imbalance, alone accounting for a large chunk of the US deficit.

​​Switzerland is top sinner with a surplus of 13pc GDP, though the report says the country faces unique circumstances as a safe-haven battling deflation.

The Swiss National Bank has bought $230bn in foreign bonds since mid 2011 to hold the franc, more than China, Russia, Saudia Arabia, Brazil and India combined.

The US Treasury’s shift in focus away from China - and towards Germany’s disguised mercantilism - reflects mounting irritation in Washington over North Europe’s "free-rider" strategy, which relies on exploiting global demand rather than generating it at home.

The US Treasury said China still needs to do more to wean itself off investment - almost 50pc of GDP - and boost consumption instead. It called for a change in the tax structure, reform of the big state enterprises, and an end to financial controls that force up the savings rate. There is concern that China’s surplus will rise again over coming years unless Beijing pushes through radical reforms.

The tone of the report is conciliatory, a far cry from the hot rhetoric of the US election campaign. Republican candidate Mitt Romney had vowed to label China a currency manipulator from "day one", a move that would have entailed trade sanctions and an ugly turn in superpower relations.

Germany’s Current Account Surplus ( from Economicshelp )

​​A few years ago, global trade imbalances were dominated by China and the US. At its peak, China’s current account surplus reached over 10% of GDP. By contrast, the US current account deficit reached over 6% of GDP. The classic image was of China manufacturing goods, selling them to the US consumer. ( See graph below )

Then with this export revenue, China bought US Treasuries to keep the Chinese Yuan permanently undervalued. Many in the US criticised China for this ‘currency manipulation‘ – In fact, Mitt Romney, the 2012 Republican Presidential candidate, promised to label China a currency manipulator from day one. However, Romney was really a couple of years behind reality.

China still has a current account surplus, but it has fallen from 10% of GDP to 2.6% of GDP in 2012. China’s currency is no longer chronically undervalued, and the Yuan has appreciated 40% in real terms against the Dollar since 2005. Although China’s economy is still reliant on exports and investment, it has begun a process of rebalancing the economy. It is not the same source of global imbalances that it was five years ago,

The biggest global imbalances, in absolute terms, now come from Germany, who have seen their current account surplus to continue to increase. In Q3 2012, their current account surplus widened to $58 211 million (equivalent to an annualised surplus of $ 232,844 million – (7.0% of GDP) OECD)   ( See graph below )

The largest current account surplus is in Switzerland (13.1% of GDP) though this reflects the unique challenges Switzerland faces as a safe haven resort (investors trying to save money in a safe currency are pushing up the Swiss Franc causing an appreciation.)

                                                                           ​​Changes in Current Account since 2008
The UK now has one of largest current account deficits in OECD.

Germany and Netherlands reflect the idea of two speed Eurozone – Countries in the north much more competitive than the south leading to large current account surplus.

Since 2008, countries on the periphery of the Eurozone, such as Spain, Portugal and Greece – have all seen a fall in their current account deficits. This is a consequence of their depressed economies. With fiscal austerity consumer demand has been squeezed leading to lower spending on imports.

However, European policies have not had any impact on the German current account surplus.

Causes of German Current Account Surplus

1. Undervaluation of Currency Since 2000
, German unit labour costs have risen by about 20%-30% less than its main Eurozone competitors. This means German exports have become roughly 20% more competitive, but there has been no change in the exchange rate – The Euro permanently fixes the exchange rates.

If Germany still had the D-Mark, it is almost certain that the increased competitiveness of German exports would have caused an appreciation in the German currency. This appreciation would have rebalanced demand – lowed export demand, and encouraged more German imports. A flexible exchange rate would have moderated the rise in the German current account surplus. The current account surplus would have much much less than 7% of GDP. But, in the Euro, there is no currency revaluation.

2. Strong Export Sector. German manufacturing has done relatively well in recent years. There have been improvements in productivity, and high-tech German exports have weathered the global downturn, better than many other countries. For example, Germany is less affected by the financial services decline like the UK; Germany is less affected by increased competition on low tech manufacturing industries like Italy.

3. Weak Consumer Demand. German economic growth has been increasingly dominated by exports. Domestic saving is high and consumer spending weak. Therefore, German growth is coming from exports rather than consumer spending.

What about Canada ? ( from Statistic Canada )

​​Canada's current account deficit (on a seasonally adjusted basis) increased $0.5 billion to $18.9 billion in the third quarter, as the deficit on trade in goods expanded further. This increase was attributable to a larger decline in exports than imports.  ( See graph below )

Deficit on goods increases further

The balance on trade in goods posted a $4.8 billion deficit in the third quarter, following a $3.6 billion deficit in the previous quarter. Exports were down with reductions in a number of commodities in the quarter, led by energy. Canada's
trade surplus with the United States declined $0.6 billion, as exports were down $2.4 billion and imports were down $1.8 billion.
Canada Current Account Balances
Total exports of goods were down $3.7 billion to $112.7 billion. This marked the third consecutive quarterly reduction in the value of goods exported. Each of the 13 principal categories of goods either declined or was unchanged in the third quarter. Exports of energy products were down $1.6 billion, on lower volumes of crude petroleum and refined petroleum products. Notable reductions were posted by consumer goods (-$0.6 billion), as a result of reduced volumes, and by industrial chemical products (-$0.4 billion), as a result of lower prices.

Imports of goods declined $2.5 billion in the third quarter, following the high set in the previous quarter. Motor vehicles and parts fell $0.7 billion and energy products declined $0.5 billion. Motor vehicles and parts imports reflected lower volumes and prices, while energy product imports were reduced by lower prices. Except for farm, fishing and food products, other major import categories were either lower or unchanged in the quarter.

So, as we can see in the graph above, current account continue to deteriorate since the start of the crisis in 2008​​. It is quite surprising as we are perceived as an Exports commodity based economy ; we should have done a lot better .
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