151109 should we worry about global trade by ABN AMRO

Global Trade Watch

Group Economics Emerging Markets Research

09 November 2015

Should we worry about global trade?

Arjen van Dijkhuizen

• Global trade growth disappoints

Senior Economist

In recent years, world trade growth has been relatively subdued. This year, world trade has

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weakened further. After a weak start of the year, CPB trade data and the Baltic dry index

arjen.van.dijkhuizen @nl.abnamro.com

indicate that global trade has shown a rebound in June. However, the latest data show a renewed weakening in the summer months. Should we be concerned?

• Is the historical relationship between world trade and growth broken? World trade typically outperforms global growth, but is also more cyclical. Over the past few years, global trade growth has been lower than global growth. Still, we think it is too early to say that the historical relationship has been broken. We expect global growth to pick-up moderately next year, and that global trade will follow.

• Emerging markets lead the slowdown in export volume growth The slowdown in global exports this year is driven by emerging markets, particularly emerging Asia. Still, according to CPB’s momentum indicator, emerging markets also lead the recent recovery, with emerging Asia again as key driver.

• Broad-based US export slowdown highlights impact strong US dollar US export values have fallen not only to emerging markets, but also to other advanced economies (Japan, eurozone). This shows that not only weaker domestic demand (EMs), but also currency depreciation versus the strong US dollar (EMs, Japan, Europe) is playing a clear role. •

Growth of import volumes falls to post global crisis lows In the first eight months of this year, import volumes have slowed to the lowest level since the global financial crisis. This is driven by EMs (particularly CEE and MENA), but also Japanese imports have weakened considerably. After falling sharply in early 2015, also driven by a sharp drop in import (including commodity) prices, China’s import values have shown some rebound since. China’s import volumes have fallen less dramatically.

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Global Trade Watch - Should we worry about global trade? - 09 November

Should we worry about global trade? GLOBAL TRADE GROWTH DISAPPOINTS World trade typically grows faster than the global economy Over the past decades, world trade growth has normally outperformed global growth. The average ratio of global trade growth versus global growth in the period 1992-2015Q2 is 1.8 (see chart). However, the chart also shows that world trade is typically more cyclical than global growth. One of the reasons for this, is that cyclically-sensitive goods have a disproportionally large share in tradeable goods. Hence, a cyclical upswing normally implies that global trade grows faster than global (real) GDP. Vice versa, during times of financial distress, such as the EM crisis in the late 1990s/early 2000s and the global financial crisis in 2007-09, global trade typically grows less faster (or contracts more sharply) than global growth.

Weak trade growth in recent years does not mean per se this relationship is broken Over the past few years, global trade growth has been relatively weak compared to global real GDP growth (in short: global growth) and also to global industrial production (see chart). The ratio of world trade growth versus global growth has been lower than (or equal to) 1 between late 2011 and early 2015. Some have even suggested there might be a structural break in the historical relationship, pointing to structural factors. For instance, it could be that the globalisation process in manufacturing, which has resulted in a cross-border fragmentation of the production chain, has largely played out. Still, we are not so sure yet that the historic relationship between global growth and trade is broken. Obviously, global trade growth has sharply fallen in recent years and remains clearly below pre-financial-crisis levels. However, global growth has also come down significantly in recent years and is still quite subdued, suggesting that global trade growth is impacted disproportionally.

World trade more cyclical than global growth

Global trade slows in recent months

Import values in USD, index, January 2012 = 100

% yoy

140

135

4000 3000

130

125

-5 -10

120

-15

115

2000 1000

-20 92

Global GDP

Global trade

Industrial production

Source: Thomson Reuters Datastream, ABN AMRO Group Economics

110

0 10

11 12 13 CPB world trade index (lhs)

14 15 Baltic dry index (rhs)

Sources: CPB, Thomson Reuters Datastream. *Import volumes estimated by correcting import values for import prices.

Global trade to profit from pick-up/stabilisation domestic demand in key economies Looking into next year, we do not think per se that the weak performance of global trade in recent years has to be a bad omen for global growth. In fact, we expect a moderate pick-up of global growth next year, accelerating from 3.0% this year (down from 3.2% in 2014) to 3.5% in

Global Trade Watch - Should we worry about global trade? - 09 November

2016. Domestic demand in advanced economies, particularly in the US and the eurozone, is picking up, while we expect China’s slowdown to remain gradual. Also looking at recent developments in global production momentum and at purchase managers’ indices, we are still of the view that in 2016 global trade is likely to follow the improvement in global domestic demand rather than being an ongoing drag to global growth.

After a rebound in June, global trade slowed again in the summer According to CPB’s indicator for global merchandise trade1 global trade picked up sharply in June (+3.4% mom), following a lacklustre first five months of the year. This upward correction in June was driven by a jump in exports and imports of emerging economies, particularly emerging Asia, which had started the year weakly. However, in July and August, global trade weakened again, with the CPB index dropping by 0.4% and 0.5% mom, respectively. The Baltic dry index shows a similar pattern, rising in June/July but falling since then. The latter index measures the cost of moving major raw materials over sea and is frequently used as global activity indicator, though it has been impacted over recent years by the oversupply of vessels.

EXPORT VOLUME GROWTH HAS SLOWED THIS YEAR Emerging markets drive down global export growth, although with some rebound Zooming in on export volumes first, global growth of export volumes has slowed to 2.0% yoy in 2015 (January-August), from 3.2% in 2014 and 2.9% in 2013. This goes hand in hand with the slowdown of global industrial production this year, with economic weakness concentrated in the industrial sectors (while the services sectors are generally holding up better). The slowdown in global exports this year is driven by emerging markets, particularly emerging Asia. Growth of EM export volumes cooled sharply to 1.3% yoy in the first eight months of 2015, from around 4.5% in 2013 and 2014. By contrast, growth of export volumes of advanced economies is accelerating further this year, growing by 2.7% yoy in January-August 2015 compared to 1.5% 2

in 2013 and 1.9% in 2014. Still, according to CPB’s momentum indicator , emerging markets seem to lead the recent recovery, with emerging Asia again as key driver.

EMs drive global export slowdown this year

EM export volumes by region

Export volumes, % yoy

Export volumes, % yoy (annual averages)

10 20

5 0

-5

-10 -10

-15 -20

-20

Emerging markets

Advanced economies

Sources: CPB, Thomson Reuters Datastream

World

94 96 Asia

98 00 02 04 Latin America

06 08 CEE

10 12 MENA

Sources: CPB, Thomson Reuters Datastream

According to CPB, the methodology has recently changed substantially (greater reliance on data from OECD and national sources, some small EMs no longer covered). These changes have affected the regional outcomes, particularly for ‘other advanced economies’ and EMs. 2 Defined as the change in the three months average up to the report month relative to the average of the preceding three months.

Global Trade Watch - Should we worry about global trade? - 09 November

Still quite some divergence, both amongst emerging economies … Amongst the emerging markets, the slowdown in export volumes this year is driven by emerging Asia, which has seen export volumes down by 0.4% yoy in January-August 2015 (compared to +5.9% and 5.1% in 2013 and 2014, respectively). This is largely explained by the spectacular monthly drop in March. Meanwhile, in Latin America export volumes have accelerated this year, to an average of +10% yoy in January-August 2015 (compared to 3% in 2013 and 5% in 2014), partly helped by currency depreciation. Still, looking at recent developments by using CPB’s momentum indicator, emerging Asia is currently leading the way in terms of export recovery. Latin America’s export momentum is also relatively strong, although the latest number is weak as export volumes contracted by 7% mom in August.

… and advanced economies Amongst the advanced economies, the acceleration in the growth of export volumes this year is driven by Japan (+3.8% yoy in the first eight months, compared to 1.8% in 2014 and -1.3% in 2013) and the eurozone (+3% yoy in 2015 so far, compared to 1.9% in 2014 and 0.4% in 2013). Exports of both Japan and the eurozone are supported by favourable currency developments. By contrast, US export volumes are only up marginally this year, by 0.2% yoy in JanuaryAugust, compared to +3.2% in 2014 and 2.6% in 2013.

US export weakness is broad based, highlighting the effects of the strong US dollar Overlooking the total picture, not only weak domestic demand (for instance in EMs) but also exchange rate developments are affecting export performance. Let us take the US as an example. Whereas the US dollar has strengthened this year and Asian FX is relatively resilient amongst EM currencies, the euro and the Japanese yen have weakened on the back of unconventional QE policies. This observation is confirmed by zooming in more closely on US exports. The table shows US exports by destination in 2013-2015. The figures show that US export values have fallen not only to emerging but also to advanced economies (Japan, eurozone). Weaker domestic demand is playing a role in many EMs, but for Europe and Japan (and many EMs) exchange rate effects are taking their toll too.

US export values by destination 2015 Share Jan-Sep 2015 (%)

% yoy

2013

2014

Europe

-0.6

2.1

-3.8

- Germany

-2.8

4.5

-1.2

4.2

1.3

-2.7

- China

9.6

2.4

-3.0

- Japan

-6.7

2.7

-5.5

Latin America

2.8

3.4

-6.7

World

2.1

2.7

-6.0

100

Asia

Source: Thomson Reuters Datastream

GROWTH OF IMPORT VOLUMES FALLS TO POST GLOBAL CRISIS LOW Import volumes down as well this year, but also showing a rebound Let us now turn to import volumes. CPB data show that growth of global import volumes has slowed to a post global crisis low of 1.3% yoy in the first eight months of 2015, from 3.4% in 2014 and 2.1% in 2013. In January-August 2015, EM import volumes contracted by 1.4% yoy,

Global Trade Watch - Should we worry about global trade? - 09 November

compared to +3.7% in 2014 and 5.1% in 2013. By contrast, growth of import volumes of advanced economies accelerated to 3.8% yoy in 2015 so far, from 3.2% in 2014 and -0.4% in 2013. According to CPB’s momentum indicator, emerging markets seem to lead a recent recovery, driven by emerging Asia, although the latest monthly data are weak (particularly for Latin America).

Slowdown in import volumes driven by CEE, MENA, Japan … There are clear differences between countries/regions. The slowdown in import volumes this year is partly driven by EMs, specifically by the CEE (driven by Russia) and MENA regions. For emerging Asia and Latin America, import volumes have also slowed this year, but have not contracted. Meanwhile, the acceleration of advanced economies’ import volumes is largely driven by the US, reflecting the pick-up of domestic demand and the strong US dollar. US import volumes have risen by 8.1% yoy so far this year, compared to 4.7% in 2014 and 0.8% in 2013. Eurozone import volumes have also accelerated this year, but at a more moderate pace than in the US (2.8% yoy, up from 1.9% in 2014 and 0.4% in 2015). By contrast, Japanese import volumes have slightly contracted (-0.2%) this year, compared to +2.3% and 1.7% in 2014 and 2013.

EM import volumes by region

DM import volumes by country/region

% yoy, annual averages

10 5

-5

-10

-15 -20

-20 92

94 96 Asia

00 02 04 Latin America

08 CEE

12 14 MENA

Sources: CPB, Thomson Reuters Datastream.

96 98 US

02 04 06 Eurozone

10 12 Japan

Sources: CPB, Thomson Reuters Datastream

… and China The CPB trade volume data are classified separately for (emerging) Asia and for Japan, but not for China. While it is natural that growth of China’s imports (and exports) are structurally coming down in line with lower domestic (and global) growth, this year’s annual trade data for China look particularly weak. Import values dropped sharply in January/ February of this year, on the back of a drop in investment and falling import prices. However, they have showed some stabilisation since March (with volatility also reflecting the timing of the Chinese New Year). This pattern is more or less visible for various trade partners, including the EU, US, Asia and Latin America. To also get a feel for the development of China’s import volumes (in the absence of Chinaspecific CPB volume data), we have estimated them by confronting China’s import value index with an import price index. The resulting picture shows that, while import volumes are also on a downward trend and also show a clear drop in early 2015, they have contracted less than import values this year (see chart). Whereas import values have on average contracted by

Global Trade Watch - Should we worry about global trade? - 09 November

15.5% yoy so far this year, import values have fallen by around 6.5%. This confirms our assumption that the sharp drop in import prices, particularly commodity prices, has been an important factor in affecting China’s (annual) import growth rates this year. Another way to say this is that China’s real import demand has fallen less dramatically than is sometimes assumed, although the longer-term, structural trend is clearly a downward one. Looking forward, we expect China’s (annual) trade data to improve next year, as we expect China’s slowdown to remain gradual and negative base effects are likely to fade out.

China’s imports by country/region

Drop in China’s import volumes less ‘dramatic’

Import values in USD, index, January 2012 = 100

% yoy

200

100

175

150

125

100

-25 -50

50 12

13 EU

14 Asia

15 Latin America

Source: Thomson Reuters Datastream, ABN AMRO Group Economics

Import values

Estimated import volumes*

Sources: CPB, Thomson Reuters Datastream. *Import volumes estimated by correcting import values for import prices.

IN CONCLUSION World trade has weakened considerably this year. There has been some improvement of momentum in the spring, but the latest data (CPB trade volumes, Baltic dry index) are not very encouraging. World trade typically outperforms global growth, but is also more cyclical. Over the past few years, global trade growth has been lower than global growth. Still, we think it is too early to say that the historical relationship has been broken. We expect global growth to pick-up moderately next year, and that global trade will follow.

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