We’ve spent a considerable amount of time discussing trends in global trade lately, touching on slumping metals demand and collapsing exports in China, sharp decreases in dry bulk trade, a prolonged period of depressed freight rates, and the emergence of a worldwide deflationary supply glut.
For their part, Goldman thinks China’s transition to a consumption-led economic model will be a drag on trade for years to come. “There are no other markets large and/or dynamic enough to offset a slowdown in China in the foreseeable future, and we forecast trade volumes to stabilize in the period to 2018,” the bank said, in a note out earlier this month.
As a reminder, here is our summary of the situation in China:
Meanwhile, we’ve exhaustively documented the laundry list of signs that point to dramtically decelerating economic growth in China, including falling metals demand, collapsing rail freight volume, slumping exports, a war on pollution that may cost the country 40% in industrial production terms, and, most recently, a demographic shift that’s set to trigger a wholesale reversal of the factors which contributed to the country’s meteoric rise. All of this means that the world’s once-reliable engine of demand is set to stall in the years ahead.
Supporting the notion that global trade is severly impaired— an assertion we made back in March after observing a double-digit decline in freight rates from Asia to Northern Europe — is a new note from BofAML who offers the following unambiguously bad assessment: “Global trade of goods and services has been in the doldrums, and the poor streak seems to be extending into the second quarter.”
Global trade of goods and services has been in the doldrums, and the poor streak seems to be extending into the second quarter. First-quarter GDP reports in the US and Germany showed surprisingly weak export growth, and the healthier run in Japanese exports has also cooled. In emerging markets, real exports have been expanding faster in Eastern Europe and Latin America but have been treading water in Asia.
Is global trade wobbling due to feeble activity growth, or are structural issues to blame? The question has been recurring since 2011, when the ongoing soft patch began. If mostly cyclical in nature, trade growth could be expected to pick up once global GDP accelerates. But if predominantly structural, then EM economies should not count on meaningful demand boosts coming from above-trend growth in DM. With Fed rate hikes looming, a jammed trade channel means less growth offsets to the anticipated tightening in financial conditions.
The income elasticity of global trade has indeed been declining, pointing to diminished trade spillovers. In particular, there has been a marked change in Asian supply chains in response to a maturing Chinese economy.
And on import growth as a leveraged play on GDP growth:
The 10-year average of world import growth as share of GDP growth reached 2.2 in 2000, but the ratio has since entered a sustained decline. In 2014, global imports picked up only 1.2 times as much as global GDP growth. Unfortunately for trade-sensitive economies, global trade is no longer amplifying the pace of global activity.
What is behind the drop in the income elasticity of global trade? It could reflect the changed composition of global final demand, more reliant on consumption rather than on export-intensive capex growth.
What this appears to suggest is that DM demand may be structurally (i.e. permanently) impaired which is bad news for export-driven economies (like China) and serves to underscore what we've been saying for quite sometime — namely that global trade has slowed to a crawl and may soon stall out altogether.