Euro area trade surplus narrows in May, weakness in net trade to extend into H2

The euro area economic growth had accelerated last year mainly due to the strength of net exports, which of all expenditure components contributed the most to growth, adding on average 0.3 percentage points in each quarter of the year. As such, the marked softening of the euro area’s trade performance in the first quarter of 2018, when the volume of exports dropped for the first quarter since the fourth quarter of 2012 and net trade contributed negatively by 0.15 percentage points from the economic growth, was a principal reason for the deceleration in GDP from 0.7 percent sequentially in the fourth quarter to 0.4 percent, noted Daiwa Capital Markets Research report.

The goods trade report for May released today implied that euro area exports have performed slightly better in the June quarter. In terms of value, exports grew for the third straight month in May, although by just 0.2 percent sequentially, following growth of 0.6 percent sequentially in each of the earlier two months. But import growth came in slightly stronger, rising 0.9 percent sequentially in May after average growth of over 1 percent in the earlier two months. Trade surplus came in at EUR 16.9 billion, narrowing by over EUR 1 billion from April. Thus, while the average value of exports in April and May rose just 0.2 percent from the first quarter average, imports on the same basis came in slightly higher by 1.4 percent, implying that net trade contributed negatively again to the economic growth in the second quarter, stated Daiwa Capital Market Research.

Goods wise, exports of capital goods dropped the most in the four months to April, tallying with the fall of over 2 percent sequentially in production of capital goods in the first quarter. A second straight quarter of negative growth in manufacturing production and export volumes cannot be ruled out.

“Moreover, surveys - such as the PMIs, for which the manufacturing export orders index in May and June were at the lowest levels since August 2016 - suggest that the softness in net trade could well extend into the second half of the year too”, added Daiwa Capital Market Research.

At 20:00 GMT the FxWirePro's Hourly Strength Index of Euro was slightly bullish at 54.2929, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -52.9011. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex