The slowdown in the global economy is curtailing export growth in the euro area. Still the biggest hit may have come already from the downturn in Russia.

1. Euro Area’s Russia Problem
Outweighs China Export Risk
Bloomberg Intelligence
Economist David Powell

2. The slowdown in the global economy is curtailing export
growth in the euro area, unsurprisingly. Still the biggest hit
may have come already -- from the downturn in Russia.

3. The deceleration in China, by contrast, looks to be a much
smaller problem for the monetary union. Growth in the
Asian nation would have to slow much more precipitously
before it would pose a big threat to the euro-area recovery.

4. Real GDP growth outside of the euro area, which is the
most important determinant of export growth, slowed
to 2.4 percent year over year in the second quarter
from 2.6 percent in the second quarter of 2014 and from
a recent high of 2.9 percent in the last quarter of 2013,
according to Bloomberg Intelligence calculations.
That trade-weighted figure includes the countries that
receive 79 percent of the euro area’s exports.

5. A further deceleration outside of the region would cause
euro-area export growth to continue to slow, though
the depreciation of the euro would limit the damage.
A simple regression model indicates that 83 percent of
the variation in real export growth is explained by the
trade-weighted measure of real GDP growth.

6. Data from the CPB Netherlands Bureau for Economic
Policy Analysis signals that the growth in real exports
for the euro area slowed to 1.2 percent in May year
over year from 4 percent in March.

7. However, the more delayed data from Eurostat has yet
to reveal the same signal. Real exports rose 4.2 percent
year over year in the first quarter compared with 3.5
percent in the first quarter of last year, according to the
expenditure breakdown from the GDP report, which is
not yet available for the second quarter.

8. Growth slowdown bodes poorly for exports

10. The biggest threat to the euro-area economy has come
from Russia. The country has contributed most to the
slowdown in GDP growth outside the monetary union
over the last year, knocking 0.23 percentage point off
the headline figure. China has chipped away only 0.03
percentage point.

11. Russia’s deceleration most damaging to euro area

13. The stall in Russia’s economy has trickled down to exports
from the euro area. The 12-month sum of the nominal value
of exports to Russia had declined by 19.8 billion euros in
May from the previous year.

14. That has been cushioned by a huge rise in exports to the
U.S. over the same period to the tune of 32.2 billion euros.
The slide of the euro versus the dollar has probably greased
the flow of shipments across the Atlantic.

15. U.S. demand cushions decline in exports to Russia

17. The annual export figures from the GDP report mask a
slowdown that is already in train, judging from quarterly
contributions.

18. Exports added 1.8 percentage points to euro-area GDP
growth on a year-over-year basis in the first quarter --
the latest period for which a breakdown by expenditure
is available.
That figure consists of contributions of 0.3 percentage
point to quarter-over-quarter growth for the first period
of 2015, 0.4 percentage point in the previous period
and 0.6 percentage point in each of the other previous
two periods.

19. European Central Bank President Mario Draghi has
already highlighted the slowdown in growth abroad
as a threat to the euro-area recovery.
At his press conference in June, he said, “There has
been some loss of momentum, modest I would say,
mostly due to a weakening of the economies outside
the euro area, emerging markets mostly.”

20. The slowdown in the contribution from exports has
been exacerbated by a rise in the drag from imports
as demand for foreign goods has been spurred by
the cyclical recovery in the euro area.

21. On a year-over-year basis, imports subtracted 2.1
percentage points from GDP growth in the first quarter --
that was the largest drag since the first quarter of 2011.
The drag from net exports on year-over-year GDP growth
in the first quarter -- 0.3 percentage points -- was the
greatest it has been since the third quarter of 2009.

22. At present, the drag from the external sector on growth
appears too small to create any major concerns from
the ECB and is unlikely to push the Governing Council
to significantly alter monetary policy. However, it does
marginally increase the possibility that policy makers will
be forced to extend their quantitative easing program
beyond September of next year.