Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

German politicians tend to view economic matters in moral terms. The country's substantial trade surplus is an unalloyed good, while persistent deficits elsewhere show profligate foreigners living beyond their means. Saving is good, borrowing's bad and balancing the budget is paramount, regardless of the impact on demand.

So Berlin will be very unhappy about the latest economic data.

Since Britons voted to quit the EU, the U.K.'s economic news has been fairly positive. Spendthrift Brits have continued to shop till they drop and buy houses that cost much more than they earn. Despite shrinking in July, the country's manufacturing activity has rebounded, as has its services sector. In contrast, Wednesday's 1.5 percent month-on-month slump in German industrial production -- the biggest drop in almost two years -- was just the latest evidence of the German economy slowing somewhat.

It's not surprising that Germany's export-driven economy is vulnerable to a confidence shock like Brexit (alongside other factors such as China.) When uncertainty is high, German investment goods aren't top of people's shopping list and domestic factories are well advised to produce fewer of them. The global financial crisis hit Germany hard for just that reason.

Surplus Nations
Germany's second largest trade surplus is with the U.K.
Source: Statisches Bundesamt
Nb. Shows amount by which Germany's exports to each country exceeds imports from those countries

But while German annoyance at Britain for rocking Europe's boat would be understandable, its stubbornness about its own economic model isn't. In reality, the U.K. and Germany are the trade equivalent of yin and yang, the one can't sustain itself without the other. 

The UK's current account deficit stands at 6.9 percent of economic output, meaning it relies on the kindness of strangers to fund the shortfall, as Bank of England Governor Mark Carney put it. Conversely, on Wednesday the Ifo Institute projected that Germany's current account surplus would climb to 8.9 percent this year, the world's largest in U.S. dollar terms.

For the sake of global stability both countries need to adjust. Britain could learn something from Germany's export prowess, while Germany could better support consumption. Arguably, Germany's need for action is greater. Sterling's post-Brexit slump may as much as halve the U.K. deficit over the next three years, by boosting exports and the returns Brits get from overseas assets, according to the BoE.

Higher tax revenues have let Berlin boost infrastructure investment, but it's pretty unlikely to embark on a massive debt-funded spending spree any time soon. So if there was one positive in Wednesday's German data, it was construction activity picking up strongly. As Bloomberg News's Alessandro Speciale has described, Germany's nascent housing boom may ultimately help bring the country's trade balance more into line.

Lacking Balance
Germany's persistent current account surplus comes at the expense of its trade partners
Source: Bloomberg

Rising home prices could make Germans feel wealthier and save a little less, while the arrival of migrants will force it to build more and import building materials. Of course, given their horror about anything that smacks of economic excess -- apart from that current account surplus -- Germans are already anxious about house prices. But while they won't want to ape the reckless Brits, a little dose of property excitement might do Germany and the global economy some good, so long as it doesn't get out of hand.

For too long Germany has relied on trade partners buying its goods without doing them the courtesy of buying enough in return. But if the kindness of strangers does indeed have limits, that applies to the Germans too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net