While the market's attention overnight was focused on China's crumbling manufacturing and service PMI, data which was already hinted in the flash PMI reports earlier in August, the real stunner came not from China but from South Korea, which last night reported an unprecedented 14.7% collapse in exports, far worse than the -5.9% consensus estimate, and more than 4 times worse than July's 3.4%.
The number is critical because not only do exports account for about half of South Korea's GDP (with Samusng alone anecdotally accountable for 20% of the country's GDP), but because it also happens to be the first major exporting country to report monthly trade data. That makes it the perfect barometer of global trade flows, or as the case may be, the canary in the global trade coalmine. It also confirms what we reported just one week ago when we said that "Global Trade Is In Freefall".
The carnage in Korean trade is unmistakable in the following Barclays chart:
Putting South Korea plunging trade in context, this was the worst monthly decline since August 2009, and was coupled by an 18.3% tumble in imports, the biggest drop since February. Worse, South Korea may soon run into a true Black Swan: a trade deficit: in August, the country's trade surplus tightened to just $4.3 billion, one third worse than tha $6.1 billion expected, and nearly less tthan half the $7.7 billion surplus in July, suggesting South Korea may be forced to dip into its reserves next, or finally engage in what many have said is long overdue: the next Asian currency devaluation as China's FX war spills over to what may be the most important harbinger of global trade.
Furthermore, with one quarter of total Korean exports going to neighbor China, this trade data is a far more accurate indicator of what is happening in China's economy.
Kim Doo-un, economist at Hana Daetoo Securities in Seoul, told Reuters that Korea's gloomy picture will not improve unless China's economy manages to rebound: "The state of the Chinese economy is crucial to South Korean exports but we will not see meaningful improvement there before the end of this year," Kim added he sees one more rate cut in South Korea by end-2015 to boost economic activity at home. South Korea's current policy rate stands at 1.50 percent.
We, on the other hand, anticipate far more aggressive devaluation by the BOK, along the lines of what China recently conducted.
Barclays digs deeper into the abysmal data:
Autos and vessel shipments fell sharply in August, exacerbating the weak underlying trend in petrochemicals, minerals and steel and masking a tentative pick up in electronics. Auto shipments were particularly disappointing, falling 32.4% y/y in August, despite a rising pipeline of new launches. Vessel deliveries also dropped sharply (-24.5%) in August, paying back the one-month surge (+56.7%) in July. Vessels and autos combined made up 4.3pp of the 14.7% headline fall. If we include petrochemicals, minerals and steel, almost 11.4pp of headline fall can be explained. One silver lining in August was that amid the declines, there are signs that electronics shipments may be bottoming out. Exports of mobile devices and PCs jumped 14.5% and 8.6%, respectively, after declining in July. The drag in household electronics shipments also narrowed. Semiconductors, managed to grow 5.7% (July: +6.2%; June: 2.9%). Ominously, shipments to China, Korea’s largest trading partner, fell more sharply in August, falling 7.6% and extending the 6.4% drop in July, likely owing to slower sales of handsets and autos, and reflecting reduced Chinese purchasing power after the CNY was devalued after 11 August.
Another breakdown showing the drop across virtually all product cateogries comes courtesy of the Y-Y chart from Goldman:
The geographic distribution of the weakness was as follows: shipments to Europe (-7.7%), Japan (-20.9%) and ASEAN (-3%) also remained sluggish in August, although US shipments (+3.4%) did marginally better.
What does this mean for the global economy, aside from the obvious:
Our concern is with the jump in the inventory/shipment ratio to 1.29x in July (June: 1.29x; April-May: 1.27x; March: 1.24x), which leaves it a shade below the Global Financial Crisis record in December 2008 (1.30x). High inventories in both supply chains are likely to weigh on IP in the months ahead, a point underscored by the weak sub-50 Nikkei PMI readings (August: 47.9; July: 47.6)
As for what this means for Korean monetary policy, no surprise here: more easing.
We now expect the BoK to deliver a further 25bp rate cut in Q4, most likely in October. We see an outside chance of an earlier move, at the 11 September meeting, but we continue to believe that the BoK will prefer to move after the initial delivery of the fiscal supplementary spending and the US FOMC meeting on 17-18 September. Also, we now expect the first rate hike in Korea in Q3 16, rather than in late Q1 16. Moreover, with key indicators for the services economy showing a healthy post-MERS rebound, we believe the urgency to act immediately is still low. We believe the existing focus on engineering a weaker KRW bias – possibly by stockpiling essential commodities such as fuel – will remain.
Of course, further easing by South Korea, or even an outright devaluation, means the ball will then be in the court of Korea's trade competitors, who will then be compelled to match the Korean move with further easing (or devaluation) of their own, and so on, until one can no longer sweep the global recession under the rug. It isn't called the global race to the bottom for nothing.
To be sure, all of this could have been avoided if as we have sarcastically been commenting for the past year, global central banks had learned to print trade.
For now however, we sit back and wait as South Korea becomes the latest country to join the global currency devaluation bandwagon. We won't have long to wait.