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Friday, 15 May 2015

Not surprising: there seems to be a plausible correlation between success in exports and a faltering domestic retail industry. Is this indeed the effect of the ‘financial starvation’ of the own population? And is that a desirable strategy to strive after for economic strongholds, like Germany and The Netherlands?!

About one week ago, the statistical bureau of the European Union, Eurostat, presented the retail sales data for the European Union. Although there was a small, negative hickup in the retail sales data in March 2015, there has been a general improvement of this data during the last twelve months, all over Europe.

Of course this development is good news and it could be a very important sign that the economic crisis, which started in 2008 and already lasts for seven years, is finally getting over. And it is definitely a sign that the consumers are becoming more confident and start to spend a larger part of their income on consumption goods again, instead of hoarding it at the bank or spending it mainly on fixed expenses.

Yet, before you raise the flag and organize a party; how good are those retail sales data within the Euro-zone anyway?

To find that out, I took the Eurostat retail sales data for the eight largest economies within the Euro-zone; not more than eight countries, in order to keep those retail sales data clearly distinguishable. 

And I particularly took the retail sales data from Euro-zone countries, as there is no influence from national, monetary policies and/or central bank actions, like you would have in countries like the United Kingdom, Poland and Sweden, which have their own currencies.

When we compare the current data of those eight, leading economies with the retail sales data of 10 years ago (2005), it is shocking to see how much impact the Euro-crisis has had on retail sales.

In the following table (data courtesy of Eurostat), I compare the indexed retail sales data from the first three months of 2005 with those of 2015 (Index: January 2005 = 100).

Retail sales results in the 8 strongest Euro-zone economies
2005Q1 versus 2015Q1
Table by: Ernst's Economy
Data courtesy of Eurostat
Click to enlarge
What is perhaps not surprising for most readers, is that two prominent members of the South-European peripheral countries – Spain and Italy – had a substantial decline in their consumer spending, since January 2005. 

Everybody knows the story about the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) and the troubles they had over the last five years; this included issues like a massive state debt, massive fiscal deficits, massive financial issues (i.e. ‘saving the banks’) and/or soaring unemployment. Particularly Spain suffered from a bedazzling (youth) unemployment and to a lesser degree Italy did too. So that makes sense.

What is rather surprising, however, is how poor the sales data in the economic powerhouses Germany and The Netherlands are, in comparison with 2005. Although these countries belong to the strongest economies in the Euro-zone, this is not visible at all in the retail data.

Since March 2005, Germany had a very poor increase in retail sales of only 1.25%, in spite of the country’s successes with the exports of goods and services and an extremely low unemployment rate of only 4.7% in March 2015.

So in spite of the fact that almost everybody has a job in Germany and the economy seems to do fine overthere, the people hardly buy more goods in the retail stores than they did in 2005.

Even worse are the data in exports behemoth The Netherlands. Since March 2005, the country showed a decline in retail sales of 2.88%, in spite of the relatively low unemployment of 7.0% and the fact that the Dutch economy and especially Dutch exports are doing fine these days.

In comparison, in Austria, Belgium, economic ‘problem child’ France and Finland, the retail sales are respectively up with 4.81%, 8.16%, 14.7% and 15.02% since 2005.

Retail sales results in the 8 strongest Euro-zone
economies from 2005 - 2015Q1
Chart by: Ernst's Economy
Data courtesy of Eurostat
Click to enlarge
So the strange phenomena occurs that two of the strongest economies in the Euro-zone – Germany and The Netherlands – are among the worst performing economies, when it comes to retail sales. 

Is that coincidence? Or does it have to do with the monomanic focus of these countries on exports and – to achieve these exports successes – wage restraint or even wage reduction?!

And is there a more general correlation between good achievements in exports and poor retail sales?

To find this out, I collected the balanced imports and exports for goods and services of these same eight countries. I think that the data speak for themselves.

Exports versus imports of goods in the 8 strongest
Euro-zone economies 2005 - 2015
Chart by: Ernst's Economy
Data courtesy of Eurostat
Click to enlarge
The best performing countries with respect to the exports of goods (see the aforementioned chart) are Spain and Italy; not coincidentially the countries with the worst development of the retail sales. 

The countries at last having more imports of goods than exports showed in general better retail sales results. In this chart, Austria is a positive outlier (more exports than imports and still quite good retail sales results) and Germany is a negative outlier (more imports of goods than exports and still quite poor sales results).

These data make sense. Spain and to a lesser degree Italy suffered from massive unemployment during the last seven years (these days the unemployment rates are still 23% and 13% for respectively Spain and Italy) and one can expect that unemployed people, looking for a better future, are nowadays willing to accept jobs at much lower wages than they would have done ten years earlier.

The result of this development will be that the wage expenses will drop dramatically in these countries and the export position will improve just as dramatically.

However, with generally lower wages people will have less money to spend on consumption and shopping, even when they have a job; this is probably the reason that you find this development back in the retail sales data of these two countries.
Exports versus imports of services in the 8 strongest
Euro-zone economies 2005 - 2015
Chart by: Ernst's Economy
Data courtesy of Eurostat
Click to enlarge
When we look at the second chart with the balanced imports and exports of services, we suddenly get a hunch of where the mediocre retail sales results of Germany might come from.

Although Germany is currently a net importer of goods, it is definitely a net exporter of services with a 22% surplus on the trading balance, as you can see in this chart. 

Even though some services are so specialistic that the wages probably do not matter much (for instance in case of high end commercial and financial services), I suspect that the restrained wage development in Germany declares its export successes in the services area and at the same time its poor retail sales results, as these are two sides of the same coin. The same is probably true for The Netherlands.

Again Austria is an outlier here, but especially in this chart it is visible that Austrian exports and imports are increasingly balancing out.

Exports versus imports of goods and services combined in
the 8 strongest Euro-zone economies 2005 - 2015
Chart by: Ernst's Economy
Data courtesy of Eurostat
Click to enlarge
The combined charts of these eight countries prove my point superfluously, which brings me to the following conclusion: 

The best way for countries to improve their export position is by restrained or even lowered wages, when everything else does not change and no great inventions or developments have been made. This is probably what has happened in Spain, Italy, Germany and The Netherlands.

What also seems clear from all these charts, is that improved exports are killing for the domestic retail sales, as financially starved people – due to long-term wage restraint and wage reduction – have less money to spend on consumption.

This makes it a very hard choice for governments: do we financially starve people to improve our export position, through the active and passive promotion of wage restraint? Or do we keep the wages up in order to save our domestic economy and perhaps lose our export position. It seems clear for which options Spain and Italy chose during the last five years; and really I can’t blame them. 

However, the governments in The Netherlands and Germany should ask themselves how sensible their export strategy is, when it kills their domestic retail industry?! That is a very important question, in my humble opinion. 

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