Europe’s export performance – a sink or swim game; Life after death: The phoenix-like rising of Japan’s life industry; revised MENA risk reports

Minds, like parachutes, only function when they are open: Open for new insights and outlooks such as our assessment of the European export performance and the growing competition with China in terms of price and quality, for one; or how exactly Japan’s life industry could recover from a period of long and low yields and where we see its biggest growth potential going forward. From Europe and Japan we move on to the Middle East and Africa for a batch of updated country risk reports and our latest digital content, an CNBC Africa interview I recently gave on the post-pandemic transition risks & opportunities for African governments.

Export performance in Europe: A sink or swim game

European exporters, and France in particular, have lost significant market share over the past two decades as China emerged as a global exporter for manufactured goods. China’s remarkable export expansion has coincided with the dramatic decline of France’s export shares since 2001: -1.7pp, compared to -1.3pp in Germany and -1.1pp in Italy. With the Covid-19 crisis, the situation has only worsened: France has continued to lose export market shares (-0.2pp y/y), even as Germany and Italy have managed to preserve theirs.

What’s the culprit? Not sectoral specialization but rather weak competitiveness in flagship export industries, including aircraft, pharmaceuticals, vehicles, electrical machinery and equipment. Our decomposition analysis reveals that French and, to a greater extent, German exporters have specialized in sectors with dynamic growth worldwide. However, they underperformed their global peers in terms of export value growth due to weak competitiveness, in particular vis-à-vis exporters from China. For instance, between 2001 and 2019, German exporters seem to have suffered from poor (price) competitiveness in highly dynamic sectors such as machinery and electrical machinery and equipment in particular. However, Germany’s underperformance gap was smaller compared to France, thanks to its specialization towards fast-growing markets (notably China) and positioning in “high-end” industrial products. While Italy’s export performance has also suffered from the rise of China, its overall competitiveness has significantly improved since 2011, reflecting the cost-cutting reforms implemented after the Eurozone sovereign debt crisis. Italy’s export performance happens to be highly cyclical, strongly correlated with global demand dynamics. In 2020, its exports grew faster than the world average in the vehicles sector, a sign of the greater resilience of Italian exports during the Covid-19 crisis compared to French exports.

Competitiveness in terms of price and quality explains around three-quarters of China’s export growth since 2001. Interestingly, taking all sectors together, we do not find that Chinese exports significantly benefit from a specialization in fast-growing sectors. China’s strong competitiveness in the machinery and electrical machinery and equipment sectors displays the opposite trend to competitiveness developments in Germany, Italy and France. European export market share losses in these sectors are certainly not only the outcome of China’s unbeatable cost competitiveness, but also the country’s astonishing success in climbing up the quality ladder.

What does this mean for policymakers in Europe? Competitiveness is a complex issue that involves multiple dimensions (e.g. price, quality, regional specialization) so there is no silver bullet to quickly tackle structural issues. Nevertheless, bold and targeted policy action could boost export competitiveness. This would include measures to improve price competitiveness (e.g. tax relief, continuation of production tax cuts), as well as efforts to speed up the reallocation of the labor force via structural reforms that improve the flexibility of labor contracts. In addition, active and effective labor-training policies are essential to address skill shortages in fast-growing sectors. Finally, supporting industries with high growth potential, but also accompanying traditional industries during the low-carbon transition phase will be key to preserving the market share of European exporters going forward. Please find our full assessment here.

Life after death: The phoenix-like rising of Japan’s life industry

Japan’s life industry as a whole has weathered the long yield winter remarkable well, staying profitable in an environment where interest rates and growth basically disappeared.

Declining interest rates dragged down investment returns, pushing them in some cases below the guaranteed minimum. At the end of the decade, these negative margins drove some insurers into bankruptcy, representing about 10% of total assets of the life insurance industry.?The overwhelming majority of the industry, however, coped quite well with the low-yield environment, which was also compounded by low growth: Over the last three decades, gross written premiums remained basically flat – with a temporary boost by the privatization of Japan Post that increased life premiums by more than 10% in 2007 and 2008. Against the backdrop of a deflating economy, however, this is nothing to sneeze at: Penetration (life premiums as percentage of GDP) remained comfortably above 5% and thus much higher than, say, in Germany (3.0%) or the US (3.1%, 2020 each).

In 2020, Japan’s life industry recorded a return on equity (RoE) of 11%. Three management levers explain this phoenix-like rising from the ashes: First, managing the product mix: from savings-type to protection-type policies; Second, managing risks: conservative mortality tables bring mortality gains; and Third, managing assets: shifting into Japanese government bonds (JGBs) and foreign bonds. Yet, we find that there is still some room for improvement within the local market, namely consolidation, even as life insurers start to hunt for growth overseas, mainly in Asia and China, arguably the biggest opportunity in the sector.

Our full report can be found here.

Updated country risk reports

Bahrain: Rated C3 (sensitive risk for enterprises), though regional support still prevents a full-blown crisis.

Kuwait: Rated B1 (low risk), experiencing a slow recovery though strong fundamentals prevail.

Oman: Rated D3 (sensitive risk), as worrisome economic imbalances developed.

UAE: Rated BB2 (medium risk), as sovereign wealth funds ensure a high level of resilience to economic shocks.

Morocco: Rated B3 (sensitive risk), the key challenge being the move from economic relief towards a sustainable recovery.

South Africa: Rated C3 (sensitive risk), as structural woes persist.

Digital content

In addition to a fresh episode of our podcast ‘Tomorrow’– on long-term investment trends with Senior Economist for France & Africa, Selin Ozyurt, we have a CNBC Africa live interview I recently gave on the post-pandemic transition risks & opportunities for African governments.