Brad Setser

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Europe, engine of global demand growth …

by Brad Setser
August 27, 2006

That isn’t a headline that you see in mainstream economy commentary.    The standard story – one that is echoed in communiqué after communiqué – goes something like this. 

Global rebalancing – code for a set of changes that will slow demand growth in the US and increase demand growth outside the US to help reduce the US deficit and the rest of the world’s surplus – requires policy changes in Asia, the US and Europe. 

Somehow, the oil exporters usually get left out despite having a bigger surplus than anyone else.    

What does Europe need to do contribute more to global demand growth?  Reform its labor and product markets.  It hasn’t done so.  So it won’t be able to contribute to global rebalancing.   

One problem.  The story isn’t true.   Not right now.   Europe may not have reformed.  But it sure has contributed to global demand growth over the past year and a half.   My evidence? European imports.  

Imports are the most direct way Europe contributes to global demand growth.  AndtThey are way, way up.    Eurozone goods and services imports grew around 20% y/y if you compare q1 06 v q2 06.   Q2 was a bit slower – the January-June 06 growth rate was only 17.5%.    For the first half, Eurozone imports are up 18.6% y/y.     US goods and service imports are up a paltry 11.9% by comparison.

Look at the following graph.   I set q1 2005 imports for both the US and Europe at 100.   Guess whose imports grew faster?


It isn’t all oil either.  China doesn’t export oil.  And European imports of Chinese goods are growing faster than US imports of Chinese goods.   The Q1/ q1 growth rate for European imports from China was 27.6%; it slowed a bit in q2, bringing the y/y growth rate down to 26% or so (January-May 06/ January-May 05) .   That is still higher than the 16.8% y/y growth in US imports from China though.  And Europe, unlike the US, pays for its imports with a hard currency backed by real export capacity, not just a comparative advantage at producing debt … 

Those in Asia debating whether China will allow Asia to decouple from the US are perhaps debating the wrong thing.  They should be asking whether China can decouple from Europe.  Remember, Chinese exports to Europe have been growing faster than Chinese exports to the US for most of the past five years.  

Rapid import growth has pushed the eurozone’s current account into deficit.  Euroland’s deficit is nothing like the US deficit of course.  But it is not trivial either – the 12 month euroland current account deficit was around 40-45b euros.   Compare that with a 50b euro surplus in calendar year 2004.  Over an 18 month period, that works out to a swing of around 90b euros, or roughly $115 dollars.    That swing shows up clearly in the chart the ECB releases every month.  

If the US runs a current account deficit of $220b in q2, the US deficit will have increased from $667b in 2004 to around $837b or so – a swing of around $170 billion.   That is slightly bigger than the swing in euroland – but euroland’s economy also isn’t as big as the US economy.    I bet the swing in the EU-25 is comparable.   The Brits are usually good for a big of extra spending …   

The facts are pretty clear.  Europe has delivered a big impetus to global demand over the past 18 months.  Despite the absence of the labor market reforms proscribed by the great and good gathering at Jackson Hole. 

Or maybe because of the absence of the proscribed labor market reforms – their impact on demand growth has never been all that clear to me.   If more job uncertainly leads to more savings (and if labor market liberalization leads to downward pressure on real wages in some sectors … ), the overall impact on demand growth is ambiguous at best.  And I doubt European firms are pushing hard for labor market flexibility because they are desperate to raise wages faster than the rigid unions will allow.  The link between labor market reform and demand growth seems pretty thin to me, at least in the short-run. 

Housing market froth – thank you Spain and France – seems far more correlated with demand growth than labor market reform.  Combine housing market froth and a relatively strong currency also helps pull in imports and, well, you get Europe over the past 18 months to a year …

Relative prices matter, not just institutions. 

So what is the problem?  I can think of two.

First, Europe’s mini-boom may be ending.    The data is contradictory. Some German business confidence data is encouraging; other German business confidence numbers are not so encouraging (hat tip, Claus Vistesen).   The same forces that pulled down the US housing market may eventually hit Spain and France. 

Second, Europe’s mini-boom helped China increase its surplus more than it helped the US reduce its deficit.   Look at the comparative growth of US exports and Chinese exports to Europe.  To make life simple – I used the European import data, but it amounts to the same thing.   The data is in euros – the increase in dollar terms in more impressive.

US exports to Europe are up.   But nothing like Chinese exports!


To bring about true global rebalancing, European imports not only need to boom.   That already has happened.   But the US needs to benefit far more than it has from that boom. 

The most recent European import boom helped push up China’s surplus – and China’s capacity to finance the US.    Not to push down China’s surplus.   The Economist, Lex, the IMF and those drafting the next G-7 communiqué might want to take note.

Someone should give Europe credit for supporting strong global demand growth over the past 18 months, and slowing the deterioration in the US current account deficit. 

Another little known fact: Europe increasingly looks like the world’s true venture capitalist, taking in funds from emerging markets (central banks and oil funds) looking for safety and using those inflows to finance European FDI.    Look at the capital flows data.    But that is a story for another time …


  • Posted by Dave Chiang

    Russia’s pride restored as it pays debts, becomes a creditor nation

    The Times (London)

    If anything underlines the popularity of President Putin with ordinary Russians, it is the sense that their country can hold its head up after years of tugging the forelock to foreign creditors…. Putin’s emergence, first as Prime Minister then as Mr Yeltsin’s successor, coincides in the mind of many Russians with their country’s slow climb out of chaos. He represents the promise of stability and a restoration of Russian pride. The news that Russia has cleared the last of its Soviet-era debts to the Paris Club closes another chapter on its painful past. Russia has paid off the debts 14 years early and is now among the creditor members of the 19-nation club. ==

    Why Russians Dislike the United States Rajan Menon ?
    Los Angeles Times

    It’s folly to assume that a new, post-Soviet generation will seek greater harmony with the U.S. or that Russia’s accession to the World Trade Organization (certain to occur) and market forces will necessarily integrate it into the West. When I asked the U.S.-educated Russian whether he shared the anti-American nationalism that I’d heard during my talks with Russian academics and officials, he said he did. What’s more, he added, his circle of friends was, if anything, even angrier at the United States for what he regarded as its arrogant foreign policy and disregard of Russia’s interests.

  • Posted by Gcs

    brad great post !!!!

    killer quote:

    “Europe’s mini-boom helped China increase its surplus more than it helped the US reduce its deficit”

    it takes two baby

    the north can’t do it alone

    china and the oilers need to buy more faster
    much faster
    and asia needs to sell more slower much slower

  • Posted by John Booke

    Eurozone imports are up 18.6% y/y in the first half – how much would that be in Euros? US goods and service imports are up 11.9% for the same period – how much would that be in Euros?

    Seems like Europeans like to publish their statistics as percentages of change rather than printing both percents and the actual amounts in Euros. Makes it very difficult for me to make meaningful and relevant comparisons to the US statistics? This is especially true for comparing Eurozone retail sales and US retail sales.

    Would you or some of your posters please comment.

  • Posted by bsetser

    John — US H1 06 goods and services imports are up $115b over H1 06. That is the sum of the actual quarterly imports – the sum of the quarterly imports from a year ago. It is a $230b increase if it is annualized.

    Eurozone imports are up by euro 130b on the same basis (euro 260b annualized). If you take the right exchange rate for the comparison as 1.25, that works out to $170b/ $340b annualized.

    At least that is the set of numbers that falls out of my spreadsheet. eurozone exports have also been growing faster than US exports though. but in absolute terms the eurozone imports grew faster than US imports by any measure between h1 05 and h2 06. the latest data does suggest some slowdown tho.

  • Posted by ABC

    Excellent post Brad.

    Sitting viewing econ blogs over the past while has often left me scratching my head. It’s often seemed like there is a blind spot in the viewing mirror.

    Anyway, i hope that this performance in Europe is maintained. High savings does suggest that euro consumers have some latitude to increase spending, without resorting to debt. Some of the traditional attitudes to Europe are also no longer ringing true. An example of this is the often cited lack of mobility, however there are massive flows of people moving inside Europe at the moment, and as I’ve mentioned before, statistical measurements of such items as employment and inflation are grounded in reality, without the hedonics and plug factors. Inflation levels and expectations are also low with some exceptions such as Spain and Ireland.

    About labour market liberalisation, many commentators miss the point. A typical French employee for example with its 35 hour working week produces as much as a British employee with a 50 hour working week. Plus pulling on the labour systems strings would unravel a system that does actually work. An example is the criticism of Hartz IV reforms in Germany for not going far enough, but I think they went as far as they could without dismantling the entire productive structure. Labour reps and unions sit on company boards, and have a say in the functioning of the company. This means that they have a stake in company productivity. They have accepted various rationalisations of the labour market over the past number of years, but with conditionalities. A very smart system that I think is explained much more ably by Richard Deeg

    I wonder if you hold your colleague Dr Roubinis view that Europe et al will get dragged down by the current US downturn? He even predicts that it will be more severe outside the US. However I’m not so certain. First, I believe if the US recession occurs there will be a rationalisation of commodity prices on a global scale, removing one of his 3 ugly bears. There is the aspect of a flight of capital to Europe which you briefly touched on, a subject i would be delighted if you would do a post on. Also the exposure to the equity markets of the European consumer is minimal. They’re savers, remember. Plus I think most Europeans have seen the writing on the wall for the past while, and reduced their exposure. Then again, it also depends on the severity of a US recession, and the possibility of systemic risks. I wonder would you care to provide an opinion on that, Dr Roubini is very certain in his call.

  • Posted by psh

    Compared to us the Euro consumer seems to have less of what an enterprise would call operating leverage. Taxes rake off more income on the way up; social services and transfer payments have an inverse effect on the way down. And wide use of direct debit, at least in Germany, limits the effect of financial leverage and debt service on the household budget constraint. The overall effect, you’d think, might be to reduce income elasticity of consumption. That would be nice for Euro resilience when we crater. But is it true? Dunno. Tricky to measure. But it’s interesting how the elasticity trends cross here, in Table 3, pointing vaguely to lower income elasticity in Europe at some point (for food, anyway.) There must be a more comprehensive η somewhere, but for now I’m happy to rip that nice work out of context for a good cause, guessing whether and when our impending debacle will suck Europe down the tubes with us.

  • Posted by claus vistesen

    Thoughtful Brad indeed thoughtful … sometimes you need to knocked off your chair a bit and have your views challenged and I certainly have been with this one …

    ‘Eurozone goods and services imports grew around 20% y/y if you compare q1 06 v q2 06. Q2 was a bit slower – the January-June 06 growth rate was only 17.5%. For the first half, Eurozone imports are up 18.6% y/y.’

    That will remember me to watch the data … I am not sure I am totally convinced though; for one I think that the fiscal tightening in especially Germany will dent those imports as will budgetary deficits in France and Italy. I mean after all there are demands of convergence to abide to. Secondly, the ECB will properly continue raising and this is also my main argument. If we look at the fundamentals here I just don’t see how Europe can get anywhere off the mark. But then again if the data keeps on going as they go I will have to concede of course :).

  • Posted by Guest

    My question is: how is Europe going to handle to intra-zone imbalances? Last year the Latin south (France, Spain, Italy, Portugal) had a combined current account deficit of $165 Billion. Germany had a surplus of $115 Billion. How do these imbalances get rectified? Are the economies of the south being hollowed out? Italy certainly seems to be. Spain has been propped up by a housing boom. Are we seeing a mini-version of the incorrigible US imbalance with the world? How much can Europe continue to drive the global economy via imports, when Germany is the only major economy with a current account surplus?

  • Posted by Peter

    This is a really wonderful post; I hope it gets wide circulation. Incidentally, when I moved (temporarily) to Germany this month I was told to tuck away my credit cards — no one uses them. I set up a bank account (which is my *right* under German law) and switched forthwith to debit.

    On to the larger point: it is very important to shower skeptics with solid evidence about European economic performance. I am not uncritical of the various Euro-models myself, but I think an ideological blindness has taken hold. Economic theory says competition is the ultimate good; European institutions limit competition; therefore Europe must be sick and in need of competitive therapy. Of course, economists (in the English-speaking world) have always worshipped at the alter of competition, but in the past their prejudices were offset by other (competing!) prejudices from the political sphere, management, etc. For some reason, economic fundamentalism became hegemonic a couple of decades ago, and we are only slowly emerging from this era.

    I hope analyses like yours function as Galilean telescopes, forcing the scholastics to open their eyes to the world in front of them.

    Meanwhile, you and others have shown quite convincingly that feasible changes in regional growth rates — apart from an implosion in the US — can have little impact on global rebalancing.

  • Posted by HK

    Brad–Europe is increasing imports, mostly from China raher than from the US. This may be partly explained by the large depreciation of the renminbi against the euro, but not much, since Europe’s imports from the US have not increased so much despite the almost eaqually large depreciation of the dollar against the euro. (Of course, what matters is real depreciation, and the renminbi may have depreciated in real terms much more than the dollar.)

    Anyway, in order to reduce the global imbalances significantly, we need a substantial depreciation of the dollar against the renminbi and oil producers’ currencies as wel as a large realignment of fiscal and monetary policies in the US.

  • Posted by Teemu Pyyluoma

    In order to USA import more to Eurozone, USA would have to manufacture more of something Eurozone wants to buy. US imports to Euroland are pretty much music, movies and software which I doubt will grow significantly enough. But something that is exchange rate sensitive, that USA excell at producing, and that could be sold to Europe is arms. So Euros basically need to buy a whole lot of millitary gear. I’m sure Bush and his pal Putin can figure something out to generate demand…

  • Posted by bsetser

    the intra-eurozone imbalances are a real issue, one worthy of a full post. my sense is that some of them will be solved semi-automatically (tho not painlesslessly) when the european housing bubble (i.e. spanish and french housing bubble) deflates. that will slow their growth, and lower their current account deficit, and reduce German exports to those regions. it would help if german domestic demand (and dutch domestic demand) reflated at the same time ..

    HK — as usual, we agree. that was the point of my post. it isn’t just that the RMB has been stable in real terms against the dollar. it is also that in the face of stronger productivity growth in China, it should have appreciated.

  • Posted by Guest

    European interests have substantial investments in North America. And France, Germany, Belgium, Britain… have all been pretty good at generating demand for their defense industry exports. No? So in the event of a deeper and prolonged American economy slowdown, might the negative affects of Europe’s declining American asset valuations and a weaker USD be offset by the benefits of relatively cheaper imports from Europe’s North American based facilities?

    I share ‘ABC’s concern about the wisdom of pressing for German labour reforms and erosion of its social safety net. Interesting looking at this morning’s FT headline for Wolfgang Munchau’s column: “Europe needs to end curbs on working hours, phase out early retirement schemes and increase incentives for the unemployed to take up work.” (and increase the ‘productivity’ of Europe’s defense sector?), while Mr. Bernanke is saying policy makers must try “to ensure that the benefits of global economic integration are sufficiently widely shared.” (through more work, better wages or social safety nets?)

    It is my fear that pressures to erode Europe’s labour rights and social safety nets could result in a counterproductive reduction in consumer demand, coupled with a boost to black markets and the sort of xenophobia (anti-Americanism being one of the lesser concerns) which is apparently plaguing Russia.

    Europe’s dependency on energy imports being another concern.

  • Posted by Guest

    2Q UK GDP grew at accelerated 2.6% annual rate: Consumer spending fueled British economic growth to its fastest pace in two years in the second quarter.

    China Puts Creditors First With New Law: China’s legislature passed a long-awaited corporate-bankruptcy law that will replace rules issued in 1986. China’s cabinet is expected to issue revised rules on foreign-bank operations in November.

  • Posted by IM

    Good post!

    Here in Spain we still consume like crazy and permabulls look very happy since 2002. It is interesting to note how chinese imports are gaining market share here. Instead of using traditional commercial, the chinese use their own channels and open thousands of stores where they send all kinds of “made in China” stuff. These stores are amongst the busyest in every location.
    But now, there is evidence (anecdotal) that the red hot housing market reached the top of the hill. I would expect less consumer spending for 2007.

  • Posted by Alex

    Three words for you Brad: oil,oil,oil. Russia and the Middle East are significant EU trading partners. In fact they trade more with the Eurozone than they do with the US and oil prices are up! Therefore its logical to assume that they would import more from the EU. Oil Prices have trippled since 2001 so its no surprise that oil exporters are flush with cash.

    I think a graph of Russian/Mid East imports from Europe would be even more interesting. These countries are rapidly becoming major supplemental engines to Bretton Woods II. Russia has already paid off its Paris Club debt:early. Imports into Russia in particular are booming. I just read an article the other day where dealers were complaining that they couldn’t keep cars on their lots(they were talking about Hummers and Cadillacs).

    But in the end its really the US exporting inflation. The arabs and Russians get dollars and sure they save but they also spend quite a bit as well.

    With China and India joing the global economy this pushes the price of oil up even further. Enriching oil exporting countries as at an even faster pace.

    Brad perhaps you and Nouriel should modify your theory about Bretton Woods and concentrate on the oil exporters and their role in dollar recycling. If oil prices continue to increase inevitably the oil exporters will play a larger role than even China.

  • Posted by Guest

    Offshore Outsourcing Finds Fans at Fed Forum: The puzzle over why the U.S. borrows so much from China and other developing countries may have a relatively benign explanation — perhaps alleviating concern over the enormous U.S. trade deficit.

    In the textbooks, rich countries are supposed to lend to poor countries, because investment opportunities are better there. But the U.S. borrows hundreds of billions of dollars a year, especially from China, to finance the massive U.S. trade deficit.

    Economists worry that these foreigners could suddenly lose their appetite for lending to the U.S., producing a sharp drop in the dollar and a rise in U.S. interest rates. But Eswar Prasad, Raghuram Rajan and Arvind Subramanian of the International Monetary Fund found that over time, developing countries that borrow from the rich actually grow more slowly, while developing countries that lend to rich countries grow more quickly.

    They conclude that incomes in developing countries such as China have grown faster than the Chinese ability to spend and invest, perhaps because their financial systems are underdeveloped. The excess, which takes the form of savings, gets sent abroad, into U.S. Treasury bonds or mortgages.

  • Posted by Oscar

    interesting post Brad.

    Tho imo i doubt that europe could sustain the global economy in the same mannor as the US does.

    we europeans are too lazy, (we actually take holidays and mad stuff like that).
    we are closet commies, ( labor reform will no go to far in europe, the social security net will not be dismantled so long as there are free and fair elections).

    chinesse imports have had an effect (i recently heard of chinesse flatpack tractors, going for a song too!), however i cant see the same kinda hollowing out occuring in europe that i percieve happening in US. as i see it cheap imports (hence even cheaper producers) have always been about (lada anyone?). while i dont like to point to differences between societies (since im a closet commie) i do think europeans will always pay over the odds for quality (being the snobs we are).

  • Posted by Laurent GUERBY

    “(spanish and french housing bubble) deflates. that will slow their growth,”

    I don’t know about Spain, but I still don’t see how the french housing buble deflating will have major effect: french cannot use their house as ATM, construction jobs are not as big as in the US, fixed rate loan are still the overwhelming majority and were taken in a very low fixed rate context (okay they’re longer maturity than previous decades but that’s about it).

    I’d appreciate any insight you have on the french situation.

    Thanks for this great post!

  • Posted by Guest

    Real Wages Fail to Match a Rise in Productivity: Wages and salaries now make up the lowest share of the nation’s economy since the U.S. began recording the data in 1947.

  • Posted by Guest

    China Calls Itself ‘Victim’ of U.S. Dollar Glut: Excess supplies of U.S. dollars are behind China’s latest problems with economic overheating, a Chinese banking regulatory official said in an interview published by the central bank-backed Financial News.

  • Posted by ABC

    I’ve been looking at some of the arguments about the sustainability of the Eurozone recovery. They include and not in this particular order

    1) the hawkishness of the ECB
    2) one size fits all doesn’t work
    3) fiscal tightening (convergence criteria)
    4) slowing/recessionary US
    5) slumping confidence
    6) rising inflation
    7) thus weakening demand

    If I take a contrarian viewpoint I would argue that

    1) the ECB is right in that with inflation at 2.5% the real interest rate, even at 3.5% nominally is only 1% and still highly accomodative.

    2) one size does actually fit all even with a diverse economy. The US is a good case in point, at various stages the centre of economic activity has shifted according to production patterns. House prices are widely divergent in the US, as are wage rates and general economic activity. Over such a diverse area there will be natural divergences of cycles to some degree or another, examples are the California recession of the early 1990’s when all the defense jobs were lost after the soviet collapse. No-one argued then that California should leave the dollar system. The point here is to maintain minimal volatility in ECB policy, which they are arguably highly successful at doing. From 2% to 3.5% is not a wild swing and much less volatile than in the US. There is also a massive convergence in bond prices and yields accross the eurozone.

    3) The impact of fiscal tightening is yet to be determined, however Germany, France and Italy are all expected to meet the criteria of the stability pact just from growth alone.

    4) About the US, and its impact, I have no answer. That’s a wait and see, unless someone wiser and more knowledgable than I can enlighten me. I will say that the engine of growth in eurozone exports is Asia at present, and as this wonderful post by Brad has pointed out Europe is now driving Asian imports at a greater rate than the US. The impact on Asia is likely to prove more decisive on the eurozones economy???

    5) Ifo refutes ZEW, which is right? I would say that EU investors and businesses are naturally a cautious bunch. Statistics can change either way.

    6) Short of another spike in oil, inflation is remarkably contained. Indications from Germany point to a drop in inflation, albeit small for July.

    7) Unemployment is down, and is shrinking quite fast, which is likely to shore up demand. Savings rates will likely stay high, but increased employment is likely to stoke increased demand. And unemployment is likely to continue to fall as businesses have reached maximum capacity and are hiring as they expand. Further employment growth is also likely in Germany as their construction industry has begun its long awaited revival.

    There does seem to be strong momentum there. Any thoughts by anyone?

  • Posted by bsetser

    ABC — I hope you are right, though i woudl be looking for signs of a deceleration in Spain, and there the signs may not be as good. Laurent, I am not an expert on France, but Daniel Gros’s work convinced me — atm or not — the wealth effect from rising housing prices seems well correlated with rising consumption/ domestic demand led growth and current account deficits in europe.

    Alex — I have not formally revised the Roubini/ Setser work to reflect the increasing role played by oil exporters. but in all my work on global reserve growth (behind the RGE firewall) i emphasize the rising role of oil state reserves in global reserve accumulation, and here on the blog i have hammered on and on about high government savings and dollar pegs in the oil exporters. i basically agree with your point — i just haven’t pulled together a formal paper.

  • Posted by psh

    re ABC’s 2), I thought all that optimal currency area business had died down along with the big tizzy over imminent Italian sovereign default. anyway, if the US can assimilate its neofeudal south, economically, Europe can certainly assimilate the doughty burghers of the Czech Rep. et al.

    re 3), on fiscal tightening, I was not aware that we needed to take the stability pact seriously — it gets broke & everybody makes frowny faces and nothing happens.

    re 5), that lack of confidence reassures me rather than otherwise. given the risks of a pre-eminent NATO ally going apesht, that’s a welcome sign of Europe’s sanity.

    and don’t forget 8) demographic implosion. Germans hate kids. They’re right. So what?

    whatta thread.

  • Posted by MrSel

    “How much can Europe continue to drive the global economy via imports, when Germany is the only major economy with a current account surplus?”

    I am tempted to say that Europe will continue to have an impact on global economy via imports, just like the US do.

  • Posted by Movie Guy

    Brad – “It isn’t all oil either. China doesn’t export oil.”

    Easy there, Pilgrim…

    China no longer exports much crude oil and refined products, but China does still export crude oil and refined fuel products.

    China Exports of Crude Oil down 17% in first half of 2006
    July 12, 2006

    From January 1 to June 30, China exported 3 million tons of crude oil and 6.2 million tons of processed oil.
    China’s exports of crude and processed oil dropped by 17 percent and 18.3 percent respectively during the first half of this year, the General Administration of Customs said.

    Industry insiders attributed the export decline to the government measures adopted in response to the soaring crude oil price on the world market.

    On May 24, 2006, the State Development and Reform Commission, the country’s industrial watchdog, raised the prices of gasoline, diesel oil and kerosene for aviation by 500 yuan (62.4 U.S. dollars) per ton, two months after the latest oil price hike this March.

    It also asked the two oil suppliers, China National Petroleum Corporation (CNPC) and China Petroleum and Chemical Corporation (Sinopec), to increase the supply of processed oil to meet domestic demands.

    China Urged to Cut Back on Oil Exports
    March 10, 2006

    Meanwhile, a government adviser urged China’s state-owned oil companies to cut back on oil exports to ensure adequate supplies at home.

    China’s oil products exports surged nearly 50 percent in the first half of 2005 over the year before, despite strong demand at home. Exports were encouraged by domestic price controls that kept prices for such products lower at home than on international markets.

    The exports aggravated shortages in southern China’s Guangdong province last August, said Guo Rongchang, a delegate from Guangdong to the government’s top advisory body, the Chinese People’s Political Consultative Conference.

    “It means that while domestic consumers were suffering from the ‘oil thirst,’ our petroleum companies were selling a large quantity of their products abroad,” Xinhua quoted Guo as saying.

    Guo urged stronger government controls over oil companies and refiners to help stabilize the domestic oil products market.

    Tax Rebate for Oil Products Reintroduced
    January 6, 2006

    China has resumed a previous policy of giving tax rebates for the export of certain oil products.

    But it has reduced the export quota for another group of oil products to ensure sufficient supplies for the domestic market, industry officials yesterday said.

    From the start of this year, the country has restored gasoline and naphtha export tax rebates that were suspended from September 1 to December 31 last year.

    Although reinstating the rebates this year will encourage domestic oil suppliers like PetroChina and Sinopec to sell more oil abroad, the nation has kept a quota system for refined oil exports.

    The Ministry of Commerce said on its website that the country has reduced the export quota for refined oil, including gasoline and diesel, to 9 million tons from last year’s 12 million tons.

    For crude oil, the export figure remains the same, one million ton.

    “As there has been no official announcement concerning the extension of the tax rebate suspension, it means the government will reinstate the preferential tax policy,” an official from the National Development and Reform Commission (NDRC) said yesterday.

    But he added related government bodies, including the State Administration of Taxation, are now studying the issue of refined oil exports for 2006, and a change in the export tax for those products could not be ruled out.

    An official in charge of export and import issues at the State taxation regulator yesterday said the tax rebates for gasoline and naphtha will continue at the same rate as before the suspension.

    The government temporarily cancelled the tax breaks in order to limit oil product exports and ensure domestic supply for the last four months of last year, a move that followed gasoline rationing in South China’s Guangdong Province due to oil shortages.

    Before the policy change, gasoline exporters in China enjoyed an 11 percentage point rebate of the 17 percent value-added tax charged on gasoline.

    For naphtha, the rebate was 13 percentage points of the 17 percent tax.

    China sold 10.47 million tons of refined oil to foreign countries in the first eight months of last year, a year-on-year increase of 42.3 percent.

    Responding to the September rebate suspension, gasoline exports in that month from Guangdong dropped by as much as 52.4 percent from August.

    Dong Xiucheng, a professor at China Petroleum College, said that restoring the tax rebates would not trigger a big rise in refined oil exports from China this year.

    “Anyway, the total amount of oil sold abroad cannot exceed the quota,” he said.

    Liu Gu, a senior oil analyst with Guotai Jun’an Securities (Hong Kong) Ltd, said domestic refined oil supply would meet demand this year, and severe shortfalls were “not likely.”

    China in the first 10 months of last year produced 44.59 million tons of gasoline, with demand at 39.4 million tons for this period.

    Both PetroChina and Sinopec yesterday said they would first and foremost try to meet domestic demand, but higher oil prices on foreign markets would encourage them to export more.

    “We are doing business, and we aim to increase profitability for our shareholders,” a Sinopec official, who declined to be identified, yesterday said.

    Sinopec sources earlier said the government-controlled refined oil price was as much as 1,700 yuan (US$210) a ton lower than the world level last year.

    China’s previous crude oil and finished products export quotas:

    Oil export quota remains unchanged
    March 4, 2005

    The Ministry of Commerce had kept its 2005 crude oil export quota for foreign-invested companies unchanged at 7.92 million metric tons, a ministry official said.

    CNOOC Ltd. could export up to 7 million tons of crude oil, while Petrochina Co. could export up to 920,000 tons, a statement posted on the ministry’s Web site said.

    In November, the commerce ministry issued its 1-million-ton 2005 crude oil export quota for local oil producers.

    China’s export quota for refined oil this year had been set at 3.23 million tons, which would be divided among 19 companies, the commerce ministry statement said.

    Crude oil, refined oil exports decrease
    February 17, 2005

    China’s crude oil and refined oil export volume has dropped sharply since Jan. 1, 2004 when China reduced or even abolished export tax rebates for crude oil and refined oil exports in order to appropriately limit exports of resources in short supply.

    Statistics show that crude oil export volume and value dropped 32.5% and 20.3% respectively to 5.49 million tons and 1.32 billion USD; refined oil exports decreased 17.1% to 11.46 million tons, and its value increased 6.3% to 3.96 billion USD. Gas export declined 28.3% to 5.41 million tons. The Export volume of kerosene and other fuel oils increased 9.5% and 140% respectively to 2.05 million tons and 1.82 million tons.

    Before the 1990s, crude oil exports had been a key mechanism for earning foreign exchange. With increasing oil demand for economic development, China has become a net crude oil importer since the mid-1990s, and crude oil export has gradually declined.

    Currently, China is exporting a small quantity of crude oil mainly to abide by its long-term trade agreements with other countries, and refined oil export is mainly for the oil processing trade.

  • Posted by Movie Guy


    I really like this post. I would like to say that I agree with it down the line. But I can’t do that.

    The problem that I have is that I don’t believe that you can make the case solely by citing Europe’s increased imports from China. Those statistics alone do not make the case for a number of possible reasons.

    I believe that I would have cited Europe’s GDP growth as well. Moreover, I would compare the GDP growth levels of the EU25, for example, to the increase in imports from China as well as the exports from Europe to global nations.

    It appears to me that the GDP growth data doesn’t fully wash with your approach of accepting the import growth from China as representing considerable net economic growth in Europe.

    I tried to make such assertions in a post that I worked on last month, and I didn’t feel that I had made the case, so I passed on posting the info. The issue isn’t imports growth treated in isolation as that doesn’t really say much, as a considerable volume of such trade could represent substitution of production sources.

    Have you reconciled Europe’s GDP growth with the surge in imports from China? I believe that you should bounce those data sets against one another.

    Just a thought.

  • Posted by Teemu

    There are pro-cyclical forces in Eurozone that make me somewhat optimistic. German consumers in particular have been unreasonably gloomy, and positive news could have a snowball effect in unleashing demand. Then there is the state, that is if unemployment drops, less money will be needed for unemployment benefits and tax revenues will rise, which quite likely will lead to more public consumption and/or tax cuts.

    As for threats: FDI returns from USA has been quite awful in Euros last couple years anyway due to USD devaluation, and I am not quite sure if US slow down will make this much worse. As for oil prices, like many have pointed out European economies are less energy (or better oil) intensive, and there is a positive feedback in terms of Gulf states and Russia importing more from EU. To this I’d add two things: First, the Euros/bbl hasn’t risen that much due to weaker dollar (in fact I wonder how much of oil price increases is simply USD loosing value). Second, as far as consumer gasoline prices go, they have a flat tax component in pretty much every EU nation that makes the relative pump price rise smaller; over here in Finland, we’ve gone from 1 euro a liter to 1.30 – 1.40/l during the oil price increase, that is a 30-40% rise while USD barrell price has doubled or tripled.

  • Posted by miju

    Excellent beginning of your article. however I believe you made a mistake in your figures : european imports from china are about 20 billions us$ annually and not 200 billions. that makes a big difference with the 240 billions US$ of chinese products imported by the US !!!
    so yes Europe has been a global driver of growth but not on China.
    Best regards

  • Posted by Guest

    Might it also be appropriate to dedicate a bit more text to understanding India’s evolving role in the game?

    “…Despite India’s economy being about twice the size of Belgium’s and it having a population of over one billion compared to Belgium’s ten million, the European country wields more influence at the International Monetary Fund (IMF)…”

  • Posted by bsetser

    miju — my spreadsheet numbers (taken from eurostat/ ecb webpage) put eurozone imports from China at 118b euros in 05, and eu–25 imports at around euro 158b in 05. let me know if you find different numbers from eurostat.

    movie guy — i should do non-oil import growth. I am pretty sure it is quite positive though. european demand growth exceeded european income growth over the past 18 months (look at the deterioration in the current account balance). I stand by my argument — european imports grew very, very fast recently.

    p.s. interesting point about Chinese exports of oil. call it a strange system of cross-subsidies — China exports low cost domestic oil to make a big profit, and sells imported oil at a loss … becuase of the domestic price controls.

  • Posted by Guest

    “…Next to the school is the BMW Information Technology Research Center, built for the sole use of BMW with $15 million in state funds last year as part of an incentive package related to BMW’s $400 million expansion of its nearby plant. That plant now makes one in six BMW’s. The gleaming, high-tech research center, completed last summer according to BMW’s design, will use Clemson graduate students to work on BMW’s custom-ordered, proprietary projects in museumlike, airy bays…”

  • Posted by Guest

    Hi Brad,
    sorry and my excuse : I have been confused by uncorrect statistics available on Datastream.
    you are right the consumer of last resort is no more American he is European !!!!
    Long life to europe !
    Best regards

  • Posted by Guest

    “…While Goldman’s sales and trading revenue almost doubled to $12.9 billion in the first half on big bets in the oil and stock markets, No. 2 Deutsche Bank could only manage a 38 percent increase to $9.7 billion during the same period with a trading strategy that’s deliberately risk-averse. “Deutsche Bank has made a lot of progress, but it will be a big task for them to take on the top tier of Wall Street,” …Wall Street’s traders have been the engine behind more than three years of rising profits at securities firms, including Goldman, Deutsche Bank, UBS AG, Citigroup Inc. and Morgan Stanley. They typically account for about three quarters of investment-banking revenue…”

  • Posted by Guest

    One more question – how might Switzerland factor into this debate?

  • Posted by Laurent GUERBY

    Brad, Daniel Gros doesn’t mention France, and I find his proxy graph (only data point where France is) unconvincing.

    When I look at first page of this document from Credit Agricole, there’s a consumption growth graph 1995-2006 for France:

    It was 4% growth during 98-2000 stock buble, but since then it went down to 2-2.5% a year.

    About housing prices, still from Credit Agricole, page 2 there’s a housing price graph for 1995-2006:

    I find no obvious correlation with consumption growth in the French case.

    No plausible mecanism in the french case and no correlation in the french data.

    We’ll see what the future holds :).

  • Posted by PDR Vet

    Brad — The last I checked, there is no “M” in domestic demand — it’s still defined as C + I + G. So why the overly complicated, convoluted analysis? Can’t you simply look at the growth in consumption and investment which should capture domestically consumed imports? By focusing on imports alone, you’re including imported inputs for goods and services that are then exported. Occam’s razor my man…

  • Posted by PDR Vet

    To follow through on my own suggestion, Eurostat says that Eurozone domestic demand growth fell to 1.6% in 2005 compared to 1.7% in 2004. In Q1 of this year, it was 1.1% on an annualized basis. I think DD growth picked up in Q2 but still the data do not make a strong case for Europe as a global growth engine.

  • Posted by bsetser

    PDR vet — well, the demand elasticity must have been kind of high to generate the observed import growth off those domestic demand growth numbers. Currencies matter as well as domestic demand. the market share of imported goods must have been increasing … since the far faster growth in imports than in overall demand. Clearly, there was a big swing in the current account balance of the eurozone — so relative to eurozone income growth, absorbtion grew faster — n’est pas? my point is that European demand growth generated more or less the same change in the eurozone current account balance as US demand growth.

  • Posted by Iasius

    “The last I checked, there is no “M” in domestic demand”
    Of course, but I don’t think domestic per se demand growth was the point. More of a what does European demand look like from the outside and there M is important.

  • Posted by Charles

    Some statistical evidence regarding House prices… (unfortunately graphs can’t be posted)

    Against the expectation of most (and mine), house prices in France seem more “out of trend” than US house prices (OECD data). Indeed Spain’s HP prices are fully off-track, according to the OECD database, and to daily evidence. If a 25 year old can get a 40 year variable rate loan, although he is only working full time for a couple of years, something must be wrong. The problem in spain is a convergence problem, I believe. real interest rates being close to nil, due to a monetary policy that takes into account only EU-average values… for more on this …

    Secondly statistical evidence (correlation btw domestic demand and house prices) comforts Brad’s assertion that as it is assumed for quite a while now in the US, Domestic Demand surge is tighlty linked with house price boom, is a pattern observable in France and Spain. Henceforth it seems that European households are currently gaining in confidence and spending “à l’américaine” the return they expect to gain from the housing market…

    House price froth in Europe seem to have strongly contributed to igniting the European growth engine… let’s see how long it lasts…

  • Posted by bsetser

    Charles — thanks for your comment. any interest in doing a guest blog on european housing market froth and domestic demand growth, graphs and all?

  • Posted by

    Charles said “The problem in spain is a convergence problem, I believe.”

    Is not the problem in both Spain (and much of France except the North where prices still languish) that it’s NOT Ullapool, Malmo, Antwerp, Dortmund, Birmingham or Moscow?? It’s sunny, pleasant, nice cuisine, drink is cheap, lower cost of living ex-housing, lots of Sea and nature, and most importantly, more like 38 degrees N. instead of 48 or 50. Take note: there is no housing bubble to speak of in Rostock. While Philadephians may have indeed bid up bits of the Jersey shore to cyclically unsustainable levels (as they’ve done times before), this is the first occasion Northern Europeans, en-masse, have had the opportunity to legally grab a piece of the Med without air and ground support….

    Anyone au fait with French property can recount the “Ryanair Effect”, whereby property prices within 60km of a French regional airport with connecting UK Ryanair service have a distinct and measurable premium to other regional cities. This may not negate the conclusion that there is a bubble, but it certainly does complicate traditional analysis.