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November 10, 2022

German-Chinese trade, stabilising commodities and the dash for cash

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Julius Probst
Arnaud Lieugaut
Patrick Malm
Karl-Philip Nilsson
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German consumers are more pessimistic than businesses

German consumer confidence is even lower than it was during the depths of the pandemic. Inflation at 10 percent and the likelihood of recession are probably the factors to blame.

The following chart plots the progression of measures of consumer and business confidence in Europe’s largest economy, with the pre-pandemic business cycle in blue and everything since in green. 

Business confidence is also very low – but it has yet to plunge past the troughs of the global financial crisis and the spring 2020 Covid-19 shock.

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Slowing momentum for Japanese industry

Japan is one of the world’s leading exporters, so when its industrial companies lose momentum, that’s a signal that the global economy is slowing.

The following chart displays Japanese industrial production as measured by its yearly and monthly growth rates. Compared to a year earlier, Japan’s industrial production is up more than 9 percent. But the month-on-month growth rate is now slightly negative. 

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Cash is king for more stock investors

Investors’ desire to hold cash increases sharply during times of economic stress and falling asset prices. This is one of those times, and it’s probably a bearish signal for the business cycle.

The following chart tracks equity drawdowns by the S&P 500 over the years as well as the average percentage of individual portfolios held in cash, based on a survey by the American Association of Individual Investors. Periods where the US was officially in recession are highlighted in gray. (In 2022, we’re not there yet.)

Cash balances are at spring 2020 levels, the survey shows.

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Tracking German export dependency on the Chinese market

China is a key market for other exporting nations, especially Germany. The following chart tracks the relative importance of exports to China for Germany, the rest of the EU and the United States. 

US exposure to China is modest here: exports account for about 0.7 percent of GDP. For the EU excluding Germany, that figure is roughly twice as high: almost 1.5 percent. 

Germany has by far the greatest dependence, with exports to China accounting for about 2.7 percent of GDP. 

Chancellor Olaf Scholz said he doesn’t want to decouple Germany from China as he visited the world’s no. 2 economy earlier this month – a trip that was controversial domestically and internationally.  

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A dramatic shift in the trade balance for China and Germany

Sometimes, international trade data doesn’t add up. According to Chinese data (which we have chosen to use for the following chart), the country recently snapped a negative trade balance with Germany that lasted for nearly a decade. 

The German data contradicts this to some extent. (This article explains the discrepancies in detail; measurement error is sometimes to blame, as is whether cost, insurance and freight are included in the figures.)

However, regardless of which nation’s statistics are used, recent data shows a dramatic shift. While Chinese exports are still going strong, imports from Germany have recently declined. The most obvious explanation is that the economic slowdown in China is weighing heavily on domestic consumption.

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Commodity prices are stabilising as a volatile 2022 winds down

The S&P GSCI is a benchmark tracking a basket of 24 different commodities.

As our chart shows, that basket is now evenly split: half of the commodities posted a positive monthly return for October, and half were in negative territory. The green line tracks that percentage. At different points this year, almost all the commodities in the basket were rising or falling in tandem. 

The GSCI index’s monthly return (in blue) has been edging back into positive territory.

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A breakdown of commodities shows fuel and coffee getting cheaper

The following chart shows the monthly return for commodities by category. 

Fuel prices are declining again. And while several food-related commodities are more expensive, there is good news for coffee drinkers: after surging earlier this year, prices are coming down.

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Plunging US oil inventories and surging production

The stock of petroleum in the US has plunged by an unprecedented amount this year, as our chart shows.

It’s now at the lowest level since the late 1980s. Part of the decline can be attributed to the government’s decision to release part of the strategic petroleum reserve to curb domestic fuel inflation. 

Meanwhile, US crude oil production is exceeding 12 million barrels per day once again -- which should alleviate price pressures, at least on the margin.

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Lacklustre US labour productivity

The Bureau of Labor Statistics recently released productivity estimates for the US economy. Unfortunately, they are anything but stellar.

The chart below graphs productivity for the years following the start of several US recessions. The current situation, as graphed by the thicker line, is not following those past trends.

During the Covid-19 shock, labour productivity initially surged rapidly, potentially due to the rise of remote work. However, for more than a year now, productivity has stagnated – and even declined. 

It’s not clear whether this is a fluke or a real trend. One plausible theory focuses on the very high number of job-switchers. The pandemic led to some significant shifts between industries, and a record number of US workers resigned from their jobs in 2021/2022.

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A domestic tourism boom in Japan

Until quite recently, international travel to Japan was completely restricted due to the pandemic. So far, only a trickle of travelers are taking advantage of Japan’s reopened borders.

However, hotel accommodation is surprisingly healthy given the lack of foreign visitors. As the first chart shows, occupancy has recovered quickly, and is close to its pre-pandemic average. 

Domestic travelers are reportedly spending almost twice as much as they did last year. The significant depreciation of the yen might also be having an effect; by increasing the price of foreign travel, it makes “staycations” within Japan’s borders more attractive.

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