The next few days and weeks will show whether the trade conflict escalates and
affects additional regions or sectors, whether it remains limited to a few sectors
and countries (and moderate responses) or whether it even abates. Since policy
announcements in the US may change from one day to the next, it is impossible
to make a forecast. However, concerning the German export industry we can
safely say that capital goods producers and the pharmaceutical industry would
suffer most from an escalation of the conflict.
The trade conflict dampens the German export outlook for 2018. And there are
several other factors which are likely to slow down German export growth during
the current year, such as the relatively high wage settlements in some industrial
sectors, which will increase production costs. With capacity utilisation very high
and the order books full, the wage settlements should be manageable in the
short run, at least on average. The relatively strong euro weighs on German
exporters’ price competitiveness. In nominal, trade-weighted terms, the euro
exchange rate has appreciated by c. 14% since the beginning of 2015.
Overall, this might weigh on the nascent investment cycle in Germany and reduce
companies’ willingness to employ more workers. Against this background, it is
no surprise that the ifo export expectations have recently declined four times in
a row. In addition, companies’ expectations for future employment have recently
fallen as well. Still, both leading indicators are still in the positive area. Despite
the trade concerns, German companies should be able to increase their exports
once again this year.