France, Germany, Italy: Good fiscal stimulus, bad trade deficits?

September 03 2020

The unprecedented fiscal stimulus plans launched by European governments this summer (phase II to relaunch growth engines after phase I emergency relief programs) should help to boost economic growth by +2.4pp in France, +2pp in Germany and +0.7pp in Italy (see Figure 1) over 2021-22.

In France, the EUR100bn (4.3% of GDP) stimulus package is geared towards achieving the green transition (EUR30bn), fostering industrial competitiveness (EUR35bn) and preserving social cohesion (EUR35bn) via transfers and labor market measures. Compared to the German stimulus package (3.8% of GDP), which is essentially demand-oriented, the French stimulus aims at reviving the supply side of the economy. The French government clearly aspires to relaunch the domestic production engine –even to reshore traditional industries such as automobiles –  by addressing the long-lasting structural rigidities of the economy. However, France is strongly reliant on imports (see Appendix), both for consumption and investment. Therefore, the flipside of this fiscal stimulus will be the widening of the already high trade deficit.

In fact, by stimulating domestic demand, government stimulus packages naturally increase demand for imports, hence benefiting trading partners: out of Europe’s major economies, we find that France could experience the largest leakage from its fiscal stimulus, causing its structural merchandise trade deficit to deteriorate by a net –EUR12bn over 2021-22. The picture is radically different in Germany where we estimate a slight decline of –EUR3bn in the trade surplus, whereas in Italy the surplus would increase by +EUR1bn. France’s fiscal deficit already stood at –2.1% of GDP (EUR43.1bn) in Q2 2020 (see Figure 2) and as half of the fiscal package is allocated to boost investment, our calculations show that in 2021-22, this would increase French imports by 1.8% of GDP (EUR42bn). Exports would only increase by 1.3% of GDP (EUR30bn). Thus, overall, this would widen France’s trade deficit by an additional –EUR12bn.

 Figure 1: Covid-19-adjusted fiscal multipliers for 1% GDP increase

Figure 1: Covid-19-adjusted fiscal multipliers for 1% GDP increase
Sources: IMF, National Sources, Euler Hermes, Allianz Research
Figure 2: Merchandise trade balance (% of GDP)
Figure 2: Merchandise trade balance (% of GDP)
Sources: National Sources, Euler Hermes, Allianz Research
Figure 3 – Import and export - growth impact of fiscal spending
Figure 3 – Import and export - growth impact of fiscal spending
Sources: Euler Hermes, Allianz Research, Eurostat

Notes: The import elasticities above are taken from a reduced form import regressions by country from 1994Q1 to 2020Q1 (OLS estimator). Quarterly change in imports is modelled in function of the change in government spending, past GDP and real effective exchange rate. The methodology is detailed at the end of the paper. 

How does this compare to the 2009 Global Financial Crisis? The 2020 stimulus is larger as a share of GDP than that of 2009 (EUR26bn or 1.3% of GDP) due to the unprecedented fall in GDP expected (-10.8%). Thus we estimate that this new stimulus should boost imports four times as much as that of 2009. Our model shows the 2009 stimulus only boosted imports by EUR8.9bn or 0.5% of GDP. Moreover, beyond the stimulus, the Covid-19 crisis has created long-lasting supply chain disruptions, which makes it hardly comparable to 2009. In the current crisis, we expect global trade to only return to pre-crisis levels in 2022, meaning that the recovery of French exports would not be as vigorous as in 2010-11. In addition, service-oriented economies, such as France, tend to suffer more from the Covid-19 crisis, making it hard to compensate for the deteriorating balance of goods.

Which countries and sectors could ride France’s stimulus wave? German chemicals (+EUR900mn), Chinese computers and telecom (+890mn) and German automotive manufacturers (+EUR775mn) could reap the most benefits from France’s soaring imports. Taking all sectors together, Germany, France’s main trade partner (EUR6.1bn), would emerge as the winner, followed by China (EUR3.9bn), Italy (EUR3.1bn) and the U.S. and Belgium (both EUR2.8bn). The top three sectors worldwide to benefit from France’s stimulus-boosted imports would be energy (EUR5bn), chemicals (EUR4.3bn) and agrifood (EUR4.1bn).

Figure 4: Top 15 country/sector exporters to benefit from France's higher stimulus-induced imports

Figure 4 – Top 15 country/sector exporters to benefit from France’s higher stimulus-induced imports
Sources:UNCTAD,  Euler Hermes, Allianz Research
What about the German stimulus? In Germany, the deterioration in the trade balance will be smaller as a share of GDP.  Import-elasticity to GDP growth is smaller (2.1%) than in France (3.1%). The 3.8% of GDP stimulus would boost imports by 1.3% of GDP (EUR43bn). As for exports, they will increase by 1.3% of GDP (EUR40bn).

The overall trade balance deterioration will be smaller in Germany (-EUR3bn): these imports will also benefit the domestic economy to a greater extent in Germany, reflecting the large share of the manufacturing sector (19% vs. 10% in France) that uses a high share of imported inputs in its production process.

In Italy, despite large trade elasticities to stimulus, the overall trade balance impact will be moderate, given the relatively small size of the announced package (1.5% of GDP). Italian imports are expected to increase by 0.7% of GDP (EUR12bn) and exports by 0.8% of GDP (EUR13bn) over 2021-2022.

Due to relatively lower import-intensity in India, Brazil and China, domestic stimuli should neither trigger sizable international leakages as a share of GDP nor a significant widening of trade imbalances (see Appendix). Yet as the stimulus has so far focused on infrastructure and construction in China, in addition to domestic suppliers, it is likely to induce positive spillovers for commodity exporters worldwide.   
Georges Dib
Economist
georges.dib@eulerhermes.com
Selin Ozyurt
Senior Economist
selin.ozyurt@eulerhermes.com
Noureddine Oulid Azouz
Research Assistant
Noureddine.OulidAzouz@eulerhermes.com