Summary of the Monthly Report March 2012

The German balance of payments in 2011

Germany’s current account surplus in 2011 fell slightly compared with 2010 to €148 billion, or 5¾% of GDP. Although exports once again grew faster than imports in real terms, there was barely any change in the trade surplus owing to a pronounced deterioration in the terms of trade. A sharp rise in import prices, in conjunction with a continued moderate increase in export prices, led to a considerable outflow of income to non-residents. In addition, world trade did not grow as dynamically in 2011 as it had done in 2010. This impacted especially on German firms’ business with Asia. However, German exports to Asia again expanded faster than exports to the euro area, whereas imports from south and east Asia did not show any noticeable rise after recording strong growth in 2010.

Over the year as a whole, the German economy’s imports from European countries continued to expand robustly. Germany’s current account surplus vis-à-vis the other euro-area countries consequently continued to contract perceptibly. It has fallen by nearly half from its peak in 2007.

The current account surplus was mirrored by net capital exports in the amount of €162 billion. The large inflow of central bank money from non-residents again considerably swelled the Bundesbank’s claims within the Target2 payment system. This reflects both the continued tension in the EMU financial markets and the balance of payments disequilibria within the euro area. Net capital exports were additionally boosted by foreign direct investment – which is generally dependent on longer-term, strategic planning – and financial derivatives transactions. By contrast, portfolio investment saw net inflows of funds – unlike in 2009 and 2010. This notably reflects the “flight to quality” observed in the wake of the intensifying sovereign debt crisis, which has particularly benefited German bonds.

National and international financial market shocks and the real economy – an empirical view

The global financial and economic crisis over the past few years has highlighted the importance of financial markets for the real economy. The bursting of the real estate bubble in the United States caused problems in the US financial sector, which then spilled over to the US real economy as well as to the financial and real sectors of other countries, especially in Europe. The intensity and international spread of the subsequent crisis caught many observers by surprise and have widely been interpreted as posing a challenge to existing macroeconomic models’ ability to explain the national and international transmission mechanisms between financial markets and the real sector. Prior to the crisis, financial markets were generally not included in macro models since, for the most part, they were not themselves deemed to contain any potential to cause disruptions. In the wake of the crisis, however, financial markets have been increasingly integrated into empirical and theoretical macroeconomic models, so that such extended models can now be used to answer questions such as the following. What role is played by the financial markets in general, and the banks in particular, in generating cyclical fluctuations? Through which channels are changes in the financial markets transmitted? What impact do national financial market developments have relative to those on international financial markets? Has the relationship between the financial markets and the real sector changed over time? Although these questions are difficult to answer, distinct progress has been made in the past few years.

The article in the March edition of the Monthly Report illustrates these advances in research by examining the outputs of a category of empirical models developed and used at the Bundesbank. The article spotlights a global vector autoregressive model (GVAR), which estimates the interaction between the macroeconomic and financial market variables of numerous advanced and emerging economies over the last three decades. This model measures the impact of an exogenous credit supply shock in Germany and in the United States on the non-financial private sector in Germany and in other European countries. The transmission channels are also analysed closely. This model shows that a US credit supply shock can clearly affect GDP in other countries. The impact of a German credit supply shock would be of some importance for Germany itself but relatively irrelevant to the rest of the world.