The German manufacturing sector has been enduringly robust over the last 30 years. Even recently, a developed mature economy which still generates a lot of its GDP from manufacturing has proved extremely resilient in the face of persistently high European Central Bank interest rates and rising raw material costs. Much of this is down to efficiency improvements squeezed out of the manufacturing sector in the first half of the decade, investments in automation, outsourcing of components and services to Eastern Europe and low wage inflation. Germany is the core economy in the Euro zone, those EU countries that have adopted the single currency.
One advantage manufacturers in the Euro zone have enjoyed over the last few years has, perversely enough, been a strong currency. But that hurts exports you will (rightly) say, look at how a surge in exports is helping US manufacturing in a period of domestic downturn. Quite right but the flip side is it reduces the cost of not only imports but in this case any dollar denominated purchases. So commodities, at least oil and base metals which are largely dollar driven products, should have proved less inflationary for Euro zone manufacturers than for US manufacturers.
Three years ago aluminum was trading at $2000/ton and one Euro equalled $0.84. This week, aluminum is at $3000/ton and one Euro equals $0.63. So US consumers have seen a 50% increase in the cost of their raw material, but Euro zone consumers have only seen a 26% increase. The position becomes even more pronounced in copper. Prices have moved from $6700/ton three years ago to $8360/ton this week, an increase for US consumers of 25% but for Euro zone consumers only 4.8%.
Fine you say but then they come to export and that turns on its head as the strong Euro makes them less competitive, negating the benefit of lower raw material cost increases. True but only a portion of any country’s production is exported, less still is exported outside of the trading block. For the Euro zone only 21% of GDP is derived from exports, made up of both goods and services, the other 79% is internal consumption. As this is goods and services, the value of goods is closer to 15%, so in reality for much of the Euro zone, commodity price increases have been modest compared to the US. This is perhaps why the ECB can afford to focus on inflation rather than boosting the economy. So far the economy has been doing just fine, thank you very much.
Currency is an oft overlooked piece in commodity costs, because most commodities are either traded in dollars or at least price fixed in dollars. We tend to ignore movements in other currencies. For a US consumer that is fine but for a global manufacturer or company engaged in extensive overseas sales, currency becomes as big an issue as metal costs ” making an already complex two dimensional game into a three dimensional nightmare.
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