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Commentary

Germany and US Bring Good News That Seems to be Bad News

Two things that are important to note are in the headlines today.

First, Germany showed a record high export surplus in October.

Germany dispatched €54.8bn in goods to other EU member states in September, but received only €48.2bn in return. Compared with a year ago exports to EU countries rose 5.4 per cent and imports rose 2.6 per cent.

This is tough cookies for the rest of the Eurozone, who are suffering from low employment and whose countries have been forced into austerity. In circumstances where each country had its own currency, the other currencies would have devalued with respect to the German currency, and eventually the German exports would have become uncompetitive.

However, since everyone uses a common currency, (Euro) there is no scope for individual layers of devaluation. Which means that unless Germany turns around and starts to buy stuff from other Eurozone countries, it is likely to continue the situation where the other countries need severe austerity. Undoubtedly in some cases austerity is justified but the competition at some point is unfair in favour of Germany.

This statistic demonstrated continued German domination in the Eurozone as a net exporter. How will other countries react?

The second is the fear that the taper is back on, because US employment data is very good:

News that the world’s biggest economy shrugged off the impact of the three-week government shutdown to create 204,000 new jobs stunned dealers and prompted anticipation that the US central bank will start tapering away its $85bn (£53bn) a month bond buying programme at its December meeting.

Financial markets had been braced for an increase of 120,000 in October non-farm payrolls amid concerns that the budget stand-off in Washington would have a knock-on impact across the wider economy.

But they revised forecasts that the Fed will wait until the spring before beginning the tapering process after the Bureau of Labour Statistics announced that an across-the-board increase in private sector jobs had swamped the effects of temporary layoffs of federal employees.

If they do taper in December, foreign investors are likely to exit just as soon as they’ve entered. Fears seem to have come home, as Indian bond yields are rising (we crossed 8.9% on the 10 year today), the dollar is strengthening against the rupee (at Rs. 62.5 now) and the US bond yield is jumping back up (2.74% from the 2.60% levels yesterday)

The international news is big macro and will impact India in terms of capital flows, and that seems to affect a lot of Indian business as well. The next week will be telling – alongside, we have Indian inflation data, IIP data and the final round of results.