German Trade Surplus Increases Sharply

Germany's current account surplus rose from €25.3 billion in the first quarter of 2006 to €36.8 billion in the first quarter of 2007. Which is very strong, particularly given the strong euro. To a large extent, however, this reflects the combined increase in the VAT and reduction in payroll taxes. While both the VAT and payroll taxes taxes domestic production for domestic use, the difference is that the VAT taxes imports but not exports, while payroll taxes taxes exports but not imports. So Germany has in effect raised taxes on imports while reducing them on exports. Given this, one shouldn't perhaps be to surprised that the current account surplus increased despite the strong euro.

The total trade surplus (the current account surplus minus net factor income and net factor income, or alternatively the trade balance in goods plus the trade balance in services and "supplementary trade items") increased even more, from €27.9 billion to €40.4 billion. This implies that foreign trade gave a net contribution to German GDP growth in the first quarter of 2.1%:points. The VAT increase is likely to have reduced consumption significantly, so GDP growth will still likely be lower than the 3.7% it reached during the fourth quarter. But the slowdown will probably not be as dramatic as previously thought.