A tale of two trade balances
Trade balance statistics are usually not among the first tier of data economists follow. When looking at high-frequency business and consumer confidence surveys, industrial production numbers and labor market reports are better indicators when assessing the state of an economy from a business cycle perspective.
However, trade balance data becomes important when economists want to spot possible structural economic shifts. This is because a trade balance conveys two messages. The first is more obvious. It simply relates to the international position of a country: how much it exports relative to how much it imports. In such a context a permanent trade deficit usually signals that a country might not be competitive enough on international markets.
The second message a trade balance conveys is subtler and thus often forgotten. It relates to the intertemporal position of a country. Here a trade deficit means that a country consumes more than it is producing and hence that it needs to import some of its consumption. Consumption is in this definition the overall consumption of a country between two points in time or during a period, i.e. private and government consumption as well as investment activity.
Countries with structural trade deficits tend to indebt themselves against the rest of the world, while countries with structural trade surpluses accumulate assets from abroad. Lately the trade balance statistics of two countries have been particularly interesting to follow: Japan and Spain. They hint that some tectonic shifts might have started.
Japan posted its worst trade deficit ever during the first half of the 2012 fiscal year. In contrast, Spain’s trade deficit narrowed significantly in the first six months of 2012, actually leading to its first monthly current account surplus since August 1998.
From an intertemporal perspective, a Japanese trade surplus meant that the country as a whole was saving and hence that the savings of the private sector could absorb the profligacy of the government. This is not true anymore. The private savings rate has dropped dramatically in Japan, mainly caused by the aging of the population. Currently Japan still has enough assets abroad generating revenues which compensate for the trade deficits. However, the longer this situation persists, the more assets Japan will have to repatriate. At some stage private assets won’t be able to absorb the public debt anymore. Then Japan will either have to look for financing from abroad, which means higher interest rates, or the Bank of Japan will have to purchase even more foreign financing, which means that inflation pressure will increase.
Spain is heading the opposite direction. Here we need to bear in mind that the size of Spain’s public debt was not its main problem during the euro crisis. Even now the ratio of public debt-to-GDP is below that of Germany or France. It was the fact that the whole country was living above its means; that private debt was weighing on the economy. Hence, the narrowing of its trade deficit means that the country as a whole, forced by public sector austerity but also the decreasing revenues in the private sector, is starting to save more again, to deleverage. It would be good news for the euro if this trend continues, because it means that a rebalancing within the Eurozone is underway.
However, it would also be bad news for Germany and its exporting sector because each reduction of a trade deficit is mirrored by a reduction of a trade surplus elsewhere.