Deutsche Bank’s Robin Winkler argues that German manufacturing faces an ongoing “China shock” as Germany’s trade deficit with China has reached a record size and now exceeds its surplus with the US. He notes that Germany’s relative price competitiveness versus China has recently stopped deteriorating, helped by Euro depreciation and rising Chinese producer prices, suggesting the bilateral trade balance may stabilize in coming months.

China shock pressure may be peaking

“We have long argued that the trade conflict with the US has been a distraction from the more existential threat to German manufacturing: the China shock.”

“Indeed, while the trade surplus with the US has recently started to recover from the tariff- induced dip last year, the trade deficit with China has continued to soar. The deficit with China is now larger than ever before, and significantly larger than the surplus with the US.”

“The good news is that the driver of the China shock has stalled lately: the decline in Germany’s price competitiveness vis-à-vis China appears to be over.”

“With this tentative reversal in relative producer prices, it is likely that Germany’s trade balance with China will also stabilize in coming months. After all, the China trade shock has primarily been a price shock.”

“That said, relative to China, German producer prices are now about 40% higher than a few years ago. German manufacturers thus face a long road toward restoring competitiveness.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)