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Brexit to hit German exports: Coface

Brexit to hit German exports: Coface article image

Germany could be one of several European countries to suffer following the UK’s decision to severe ties with the European Union. (EU)

Coface, a global leader in credit insurance, predicts German exports to the UK could decrease this year by up to 10 percent in the wake of Brexit, representing a loss of about 10 billion euros.

Brexit has thrown global financial markets into turmoil due to increased uncertainty. The British pound has nosedived in value against other currencies.

Against the US dollar, the pound devalued by more than 10 percent after the referendum.

Coface says European economies that have strong economic ties with the UK and from small domestic markets are likely to suffer from the expected economic slowdown in the UK.

Ireland, followed by Belgium, the Netherlands, Denmark and Sweden seem to be the most at risk.

“High political insecurity after the referendum and the strong shifts in the currency markets will also have their impact on trade between the UK and larger markets in the region, especially Germany,” says Coface.

Important trading partners

This is because the UK is among Germany’s most important trading partners.

According to trade data for the current year up to April, the UK is with a total turnover in imports and exports of about 42 billion euros Germany’s fifth important trading partner, following France (58 billion euros), the US (56 billion euros), China (54 billion euros) and the Netherlands (54 billion euros).

For last year as a whole, UK (with 128 billion euros) also had the fifth rank for total turnover in imports and exports.

Since there is a huge gap between German exports to and imports from the UK, Germany had a trade surplus against UK of about 51 billion euros last year, what was just slightly behind the United States (55 billion euros).

Germany’s trade relations to the UK are concentrated to a few sectors.

About two thirds of German exports into the UK are stemming from just five good categories:

  • Automotive and other vehicles have a share of 39 percent
  • Mechanical Engineering (10 percent)
  • Pharmaceuticals, Chemicals and Data Processing/Electrical/Optical goods (each with shares between 6 and 7 percent)

German imports from the UK are less concentrated, since the five most important goods sum up to about 55 percent.

These include:

  • Automotive and other vehicles (22 percent)
  • Chemicals (14 percent)
  • Data Processing/Electrical and Optical goods (8 percent)
  • Oil/Gas and Pharmaceuticals (each about 6 percent)

If you compare UK’s share in total Germany exports of 7.6 percent and in total imports of 3.8 percent, you can easily calculate the over-or under-representation of trade in goods for the different German sectors.

Sectors with a (much) higher share of UK compared to the total export share of 7.6 percent are fishing (14.4 percent), automotive (13.2 percent) and pharmaceuticals (8.9 percent).

On the other hand, exports to the UK are under-represented (excluding commodities and commodity-related exports) especially in forestry (0.8 percent), tobacco (2.5 percent) and agriculture (3.7 percent).

Regarding imports, especially chemicals (6.6 percent), automotive (6 percent) and oil/gas (5.7 percent) are over-represented.

On the contrary, forestry, agriculture and paper/wood/furniture are under-represented with shares of just 0.2 to 0.7 percent.

Brexit says to calculate the possible impact of the Brexit on German (nominal) GDP this year, it used the following assumptions:

  • Since Coface lowered its GDP growth forecast for the UK from 1.8% to 1.2% and due to the pound’s devaluation, German exports to the UK are expected to decrease this year by up to 10 percent.
  • If the pound weakens further, the decrease in nominal terms could be even higher (Up to April, German exports to the UK increased by merely 1.1 percent year-to-date).

This would represent a loss in nominal GDP of about 10 billion euros, just from the export side – compared with the reference of +1.1 percent.

Up to April, German imports from the UK went down markedly by 8.1 percent. After the pound’s depreciation, the decrease is expected to weaken over the course of this year. Hence, imports could more or the less stagnate for this year as a whole.

Since this would be a drag on German net exports, nominal GDP would be dampened further by about 3 billion euros.

Sectors with close export ties pose the biggest risks

Therefore, the negative impact – in nominal volume terms – amounts to 13 billion euros in this scenario, which represents just 0.4 percent of nominal GDP. In real terms and therefore adjusted for currency and price effects, Brexit’s impact probably is much lower and should be just between 0 and 0.1 percent this year, if directly related to trade in goods.

Nevertheless, sectors with close export ties to the UK could suffer from the biggest Brexit-risks.

But especially in automotive and in pharmaceuticals, the exchange rate elasticity of imports and exports is much lower than in other goods categories.

Further, German companies could suffer from the pound’s depreciation due to increased competition from increasing imports from the UK. This is especially due for chemicals and suppliers in the car industry.

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