Global Trade Update: Momentum Lost

With eurozone demand stabilising and the UK economic recovery spontaneously bursting into life, the global economy has been given a welcome shot in the arm. Indeed, set against a backdrop of an entrenched recovery in the US and continued emerging market outperformance (albeit from a lower trajectory relative to recent years), the European turnaround will be key to sustaining global growth. However, the macro outlook is still far from rosy, and we highlight the slowdown in global trade momentum as being a major weak point that could yet usurp the recovery.

The chart below, which shows the momentum in total world exports, neatly encapsulates this predicament. The precipitous collapse in trade back in 2008 followed a fairly stylised recovery path: a slowdown metastasizing into full-blown contraction, before entering a recovery phase and then finally back into expansion territory. The post-financial crisis boom has proven short-lived, with momentum subsiding as aggregate exports struggle to hold ground. The situation as of the second quarter of 2013 (the latest quarter for which full data is available) is particularly precarious. From this point exports could suddenly take off in line with the recovery in European demand, or collapse as the world's major surplus states continue to push pre-crisis growth models that have exceeded their use by date. It is difficult to say with any certainty what the near-term direction will be.

A look at the disaggregated data provides additional insight into current dynamics. In recent years developed markets have struggled to expand export market shares, while emerging markets have enjoyed robust headline growth in foreign currency earnings. This disparity has since normalised with both developed and emerging market export growth deteriorating. Most of the big players in the industrialised world - the US, eurozone and UK - have seen growth slide in recent quarters. Even the prized German industrial machine has faltered, with exports now contracting in year-on-year terms. More specifically, the latest data show US exports expanding by a meagre 3.3% y-o-y in July, with the UK experiencing near zero growth of 0.5% in August and eurozone exports falling 5.9% in the same month. Japan is an obvious anomaly among developed states, with exports jumping 14.6% in August on the back of monetary policies (part of the much-hyped Abenomics programme) which have driven down the value of the yen against the other major currencies.

Going Full Circle
Global - World Export Momentum

With eurozone demand stabilising and the UK economic recovery spontaneously bursting into life, the global economy has been given a welcome shot in the arm. Indeed, set against a backdrop of an entrenched recovery in the US and continued emerging market outperformance (albeit from a lower trajectory relative to recent years), the European turnaround will be key to sustaining global growth. However, the macro outlook is still far from rosy, and we highlight the slowdown in global trade momentum as being a major weak point that could yet usurp the recovery.

The chart below, which shows the momentum in total world exports, neatly encapsulates this predicament. The precipitous collapse in trade back in 2008 followed a fairly stylised recovery path: a slowdown metastasizing into full-blown contraction, before entering a recovery phase and then finally back into expansion territory. The post-financial crisis boom has proven short-lived, with momentum subsiding as aggregate exports struggle to hold ground. The situation as of the second quarter of 2013 (the latest quarter for which full data is available) is particularly precarious. From this point exports could suddenly take off in line with the recovery in European demand, or collapse as the world's major surplus states continue to push pre-crisis growth models that have exceeded their use by date. It is difficult to say with any certainty what the near-term direction will be.

Going Full Circle
Global - World Export Momentum

A look at the disaggregated data provides additional insight into current dynamics. In recent years developed markets have struggled to expand export market shares, while emerging markets have enjoyed robust headline growth in foreign currency earnings. This disparity has since normalised with both developed and emerging market export growth deteriorating. Most of the big players in the industrialised world - the US, eurozone and UK - have seen growth slide in recent quarters. Even the prized German industrial machine has faltered, with exports now contracting in year-on-year terms. More specifically, the latest data show US exports expanding by a meagre 3.3% y-o-y in July, with the UK experiencing near zero growth of 0.5% in August and eurozone exports falling 5.9% in the same month. Japan is an obvious anomaly among developed states, with exports jumping 14.6% in August on the back of monetary policies (part of the much-hyped Abenomics programme) which have driven down the value of the yen against the other major currencies.

Struggling To Hold Ground
Global - Export Index

Among the BRICS, Brazil and India are faring the worst, with the 3-month moving average year-on-year series (used to smooth out the higher volatility in the series) hitting -0.1% and -2.5% September and August respectively. Russian trade has experienced some welcome respite in recent months following a particularly dire 2012 and H113, with the most recent data showing exports increasing 6.8% y-o-y in August. The biggest casualty is arguably China where export growth on a three-month moving average basis came in at an anaemic 4.0% in September. Given that China has become accustomed to years of strong double-digit export growth rates as a result of the government's aggressive industrial policies, the recent slowdown is a particularly powerful omen. The old Chinese economic model is not dead yet, but could be on the way out.

Creeping Insularism Is No Friend Of Unfettered Trade

As we alluded to above, determining the near-term path is difficult. The recovery in Europe, which has long had the greatest appetite for the world's goods, suggests that international trade will improve in the coming quarters. For now, our bias leans in this direction. However, we have consistently warned in recent years of the threat posed by global trade rebalancing - or, more specifically, the lack of it. It is clear that despite the rhetoric, the major surplus states have made little progress in transitioning away from the mercantilist economic models that paid dividends during the 1990s and 2000s. We have also argued that a failure to reverse the structural imbalances that have underpinned the global economic crisis risks fuelling trade tensions (cries of 'currency war' are certainly symbolic in that respect) and a more disorderly correction.

In a sign of creeping insularism, governments have focused more on protecting national industries and jobs, rather than forging ahead with a multilateral framework for resolving the global economic crisis. This brings with it the prospect of rising trade protectionism - if not of the old school tariffs and quotas variety, then certainly in the form of local content requirements and excessively burdensome health and safety standards. The risk here is that efforts to undermine free international trade, by trying to boost exports and simultaneously deter imports, could undo much of the advances made in recent decades, or at least retard the pace of future advances. Following the disastrous trade policies of the 1930s, it took the best part of seven decades of piecemeal multilateral negotiations to undo the apparatus of global trade protectionism. This progress was hard fought, but the gains can be easily lost. For now, there is very little to suggest that national governments will fight as hard to maintain the pre-crisis spirit of trade and capital liberalisation. As such, this will be a key risk to international trade over the longer term.

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Sector: Country Risk
Geography: Global, India
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