1. Research

Brexit is leaving imprints: German exports to the UK on the decline

Author
Analyst
+49(69)910-31730
Deutsche Bank Research Management
Stefan Schneider
Dropping for the third consecutive year in 2018, nominal German exports to the UK were down by over 7% compared with 2015, the year preceding the Brexit referendum. The depreciation of the pound sterling and economic uncertainty in the UK were the key drivers behind the downturn. On the sectoral level, the pharmaceutical industry suffered the sharpest declines. In this sector, German exports to the UK look set to have nose-dived by more than 40% between 2015 and 2018, whereas auto exports to the UK plunged by over 20% in the same period.
In 2015, the year preceding the British referendum on the exit from the EU, the UK accounted for 7.5% of German goods exports. Back then, the country took third rank in the list of Germany's key export markets – behind the US and France. By 2018, German exports to the UK had declined for the third year in a row, falling by over 7% on 2015 in nominal terms. By contrast, aggregate German goods exports in the period from 2015 to 2018 likely rose by around 11% (final annual data for 2018 is not yet available). Accounting for "only" around 6% of total German exports, the UK has been surpassed by China and the Netherlands in the ranking of Germany's major export markets.
There are numerous reasons why German goods exports to the UK are on the decline. First, the euro appreciated by over 20% versus the pound sterling between 2015 and 2018 (annual averages) and, as a consequence, German exports to the UK have become more expensive. Secondly, the Brexit resolution and the ongoing discussion about the regulatory details of its implementation have resulted in economic uncertainty, dampening investment and overall economic growth in the UK.
On the sectoral level, German exports diverged widely, with the pharmaceutical industry suffering the sharpest declines. Here, exports to the UK look set to have collapsed by over 40% between 2015 and 2018, as the sector was hard hit by the exchange rate effect, given the UK's competitive pharmaceutical industry, which in many instances allows British consumers to choose among alternative domestic products, if prices of imported drugs go up. In 2015, more than 10% of German pharmaceutical exports still went to the UK. By 2018, however, the UK’s market share had halved.
Exports of German auto industry to the UK plummeted by over 20% from 2015 to 2018. This decline can also be ascribed to the demand cycle, as car sales in the UK had reached a peak after rising steadily in the years preceding the Brexit resolution. Against this backdrop, new car registrations would probably also have declined in 2017 and 2018 without the Brexit resolution.
The chemical industry as well as food and metals have suffered only moderate declines in their export activities with the UK since 2015. In the same period, mechanical and electrical engineering even reported nominal increases, which shows that the price elasticity of demand for specialised machinery or electronic capital goods – the focal point of German producers – is limited. Given the challenging political and economic environment and the associated reluctance to invest in the UK, however, the positive performance of mechanical and electrical engineering comes as a surprise.
 

© Copyright 2021. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, licensed to carry on banking business and to provide financial services under the supervision of the European Central Bank (ECB) and the German Federal Financial Supervisory Authority (BaFin). In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG, London Branch, a member of the London Stock Exchange, authorized by UK’s Prudential Regulation Authority (PRA) and subject to limited regulation by the UK’s Financial Conduct Authority (FCA) (under number 150018) and by the PRA. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Inc. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.

15.3.0