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Why German exports are falling

  German car factory © Getty images
Germany's industrial engine has stopped

Project Fear failed to move us British, but it really should have set the wind up the Germans.

For a long time, Germany has been an exporting power plant. The brilliantly efficient factories provide well-designed, fantastically designed products that sell at world-class prices. Europe's largest economy is also the world's third largest exporter, and with more than $ 300 billion annually, it also runs the world's largest trade surplus. It is dominated by pharmaceuticals, medical equipment, machine tools and cars, and has few alike.

Brexity headwind

That may be changing. In May, seasonally adjusted exports fell by 1.1%. The June figures, released last Friday, were expected to show a rebound, but instead fell again, with a further 0.1% decline over the month. Over the year as a whole, exports are now down 8%. There are many reasons for that. China is declining and is no longer dependent on German imports. The United States is not buying as much as it used to be, and many euro zones have weak consumer demand.

But there is another crucial factor: Brexit.

Germany's exports to the UK are particularly weak. Overall, German exports to the UK are down 4% year on year, Commerzbank's figures show. A couple of years ago we were their third largest export market, but this year we have fallen to the fifth and we are still falling. "In April and May, German exporters sold almost as much to Austria as to the UK," noted investment bank ING dryly in an analysis of recent figures.

It hardly needed to add that Austria's population is only eight million compared to our 65 million. In reality, the UK market is in free fall. According to research from Deutsche Bank, pharmaceuticals have become the hardest hit sector, and exports from that industry fell by 40%. Car exports have now been reduced by more than 20%.

There are some short-term factors working there. Sterling weakened sharply after the referendum, which made all Eurozone exports less competitive. At the same time, the UK economy has weakened, and companies that are afraid of closing without a deal have deferred investment.

We have been Brexiting for many years

But there is also a bigger picture. Our eurozone trade flows have been declining rapidly for many years now. From having accounted for close to 60% of our trade, when imports and exports are combined, it is now below 50%. It has fallen by one percentage point a year for more than a decade. Brexit has accelerated that.

Companies have understandably increased their efforts to find new markets and new import sources over the years we have been arguing about Brexit. And the areas where the UK has been strong in recent years, such as technology, culture, business and legal services and engineering, have all been much stronger outside Europe than within it. We sell less and less to countries like Germany every year, and now we buy less and less of them too. In many ways, our vote to leave the EU was just a matter of politics that captured the economy – measured by trade, we had left for many years.

It doesn't matter much to the UK. We had a huge trade deficit with Europe, and especially with Germany, so we have relatively little to lose if there is a further decline. By definition it did not work very well for us, otherwise we would not have had such a large deficit. But it will do something for the countries where exports are falling sharply. They operated with large profits, which is why jobs and the company's profits were boosted by easy access to the UK market.

Once lost, it will not be easily replaced. Of course, Germany will survive just fine. It has many good companies and many other large markets. The UK will still be one of them. But it is now clear that Germany will suffer significant damage. It is almost certainly too late now for the German government to change its mind and try to construct a softer Brexit. However, as the economy has long-lasting damage, it may well be a bill for the leaders who failed to broker a compromise that worked for both sides.

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