July 28, 2015 6:46 pm
The warning signs of trade stagnation
Stephanie Flanders
Data highlight investment slowdown and limits to recovery, writes Stephanie Flanders
With Greece out of the spotlight, global investors have returned to worrying about a future rise in US interest rates and the volatility that could bring to markets. They appear to be supremely unconcerned by the stagnation in world trade this year. However that could turn out to be a costly mistake.
The problem has been getting worse for some time. Trade bounced back fairly well in 2010 after the global recession but it has disappointed ever since, growing by barely 3 per cent in 2012 and 2013. Now it seems the world cannot manage even that.
The prevailing view is that we do not need to worry about this weakness because it is largely structural. According to this argument, exceptional forces that conspired to make growth more trade-intensive in the 1990s and 2000s are now coming to a natural end.
Those decades brought a historic decline in trade barriers and global transportation costs, together with the dramatic entry of emerging market economies into the world trading system — notably China. All that, in turn, helped produce a much deeper division of international labour, which sent different links of a single production chain to far-flung parts of the world.
A recent study by the International Monetary Fund calculated that in the 1990s, every 1 per cent rise in global income generated a 2.5 per cent rise in global trade, much more than in the past. But not any more. Obviously, global growth could not become more trade-intensive forever. In fact, the volume of trade in services is still going up. But in manufacturing, rising costs and greater self-sufficiency in emerging markets, and changing production techniques around the world, have led many of those intricate global value chains to be unpicked. Since 2013, every 1 per cent of global growth has produced a trade bump of just 0.7 per cent.
China is the great case study. In the mid-1990s as much as 60 per cent of the value of the country’s goods exports came from imported parts and materials. That has now fallen to about 35 per cent. In the US, manufacturing imports have not risen at all as a share of gross domestic product since 2000. In the decade before that they nearly doubled.
For some, this is perfectly natural and nothing to be concerned about. But structural forces can explain why trade is growing more slowly — they cannot explain why it is barely growing at all.
In fact, there are three more short-term explanations for the weak trade numbers, which should demand the attention of policymakers.
The first is that global investment demand continues to fall short. For several years, emerging market economies bucked the trend but capital spending has now slowed in such countries as well. This translates into lower trade growth because capital goods are more trade-intensive. It matters because it does not just dampen growth today but could also limit growth in the future by further slowing growth in productivity.
Another warning from the trade data is that the recovery in domestic demand in the US and Europe this year is not being seen elsewhere. Latin America appears to have contracted between the end of March and the beginning of July, and JPMorgan estimates that Asian emerging market economies — excluding China — grew by just 1.4 per cent. China is doing better but not nearly as well as it was.
This weakness is worrying at a time when many governments in such countries have less room to ease policy than they did before and are already dealing with weak commodity prices and a stronger dollar.
Last weekend, Beijing announced new measures to revive demand through stronger exports — including a slightly more flexible currency. I doubt the Chinese authorities are about to engineer a big depreciation in the renminbi when they are also trying to develop its role as a reserve currency, and Chinese companies have borrowed so much in dollars. But the pressures are clearly there.
Net trade made a negative contribution to eurozone growth in the first three months of 2015 and trade’s contribution is likely to be barely positive for the rest of 2015.
For all the talk about the euro, the single most encouraging aspect of Europe’s recovery since the turn of the year has been the strength of domestic demand. But private capital investment in the eurozone is still flat and has been even weaker than in the US since 2010.
If consumption and investment firm up on both sides of the Atlantic, we should start to see global trade pick up as well. But policymakers should not kid themselves that trade is going to rescue them from their domestic economic travails, as it did in the past.
The writer is chief market strategist for Europe, JPMorgan Asset Management
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