The recently released IFO survey of German export expectations has shown a continuing downward trend which started in the spring of this year. Since mid-March, the euro has strengthened against the US dollar, admittedly with a great deal of volatility. Based on economic theory, it is tempting to see a causal relationship between the two developments: a stronger (weaker) currency would weigh on (boost) exports, something which would be reflected in the assessment by companies of their export opportunities.

In order to explore this, the following chart shows the IFO export expectations index on the left hand side and, on the right hand side, the euro/dollar exchange rate and the real effective exchange rate of the euro, both in index terms.



Whether one looks at the euro/dollar rate or, more appropriately, the real effective exchange rate of the euro, the relationship with export expectations seems to be highly unstable. There are periods with a negative correlation, which fit the theoretical a priori (end 2001-early 2002; second half of 2005; early 2008; early 2015). However, there have also been periods with a counterintuitive positive correlation (e g between 2011 and 2014). This serves as a reminder that export expectations depend on the evolution of price competitiveness (in which case the correlation would be negative) as well as on the evolution of foreign demand (for given prices and exchange rate). We can call these respectively a price and a volume effect. If the latter dominates, the correlation between the exchange rate and export expectations may be very low or even positive. To illustrate this point: in recent years, efforts of the Federal Reserve to boost growth have weighed on the dollar but despite a stronger euro, German exporters were focusing on the expected volume effects of a pick-up in US growth. With respect to the recent softening of export expectations, the slowdown in China probably plays a considerable role.