Something different to worry about

The imminent threat of a Greek exit from the euro area is receding. Although tentative, evidence suggests that the associated volatility and uncertainty has not had a material impact on the ongoing recovery in the euro area. But we'll have to watch measures of corporate and consumer confidence closely in coming weeks. Greece, with less than 2% of euro area GDP, would only be able to impact the euro area cycle through channels of financial contagion and economic confidence. But as the Greek crisis has fallen in importance, so other global risks have become more apparent. The sharp corrections in the Chinese stock market and associated drop in commodity prices have shifted markets' focus towards weak global trade growth, especially in Asia. And Fed Chair Yellen's testimony this week clearly indicated that the Fed intends to start tightening before the end of the year.

In turn, that could make conditions for emerging markets more challenging. In the case of Europe, then, while markets have been focused on the risks from Greece, a more serious threat to recovery could be emerging in Asia. Since the end of last year, trade in Asia has weakened. That's partly due to the slowdown in China, which was particularly acute in Q1. That's also reflected in poor global trade growth in aggregate. Although trade is set to pick up, alongside the upswing in global production growth, it's clear that, the era of dynamic emerging markets growth is at an end, notes Credit Suisse.

As the euro area is perceived as being sensitive to global demand; and its trade exposure to emerging markets has risen considerable over the past 15 years, could weak global trade, driven by slow emerging markets, derail the euro area recovery. There are reasons to be sanguine, although global trade growth has been poor, euro area exports have, at the margin, performed better shows the level of euro area real exports. Having dipped below their trend since 2012 during the summer last year, euro area exports recovered and strengthened earlier this year. Euro area exports are now growing faster than global trade - an unusual occurrence in the absence of an idiosyncratic euro area recession.

That's consistent with the euro area gaining some market share. This in turn may be a consequence of the fall in the euro area's real effective exchange rate. But it may also reflect a pivot in the direction and form of exports as rapid investment growth in China and other emerging markets weakens and consumer demand in developed markets strengthens. During the 2000s emerging markets took an ever higher share of euro area exports. Since then, the tide has turned. At the same time, exports of consumer goods - rather than capital goods - have risen in importance.

As such, the euro area export sector is coping well with the transition in global growth back towards developed markets. Indeed, the euro area's vulnerability to a more material slowdown in Asian investment spending looks limited. The table below shows the share of European economies' output to meet final domestic investment and consumer demand in other economies. For the euro area as a whole, consumer spending in the US and UK is almost three times as important as investment spending in China and the rest of Asia. Even Germany, where output is relatively skewed towards exports of investment goods to Asia, exports to satisfy consumer spending in the US and UK still predominate, says Credit Suisse.