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16 July 2012
Economist Insights Trading places
The news flow has been focusing on Europe, but there have been some worrying signs in global trade. Exports never quite recovered from the crisis and remain below the long-run trend. With export growth numbers coming out of some Asia Pacific economies looking weaker, maybe there is more to worry about than just the euro. However, there is some silver lining to the lower level of world trade – it comes along with a substantial reduction in global trade imbalances over the last five years. In addition, some surveys have recently turned more positive on export growth. Joshua McCallum Senior Fixed Income Economist UBS Global Asset Management email@example.com
Gianluca Moretti Fixed Income Economist UBS Global Asset Management firstname.lastname@example.org
The news flow (and indeed, this weekly commentary) has a tendency to focus on the places in Europe where stresses are occurring on an almost daily basis. If you take a step back, there are other issues to catch an investor’s attention. Take a look at the places that rely on trade and there has been some worrying news on exports, possibly reflecting spillovers from Europe. Global trade can be considered the pulse of the global economy. When the pulse is steady, trade is growing strong and the health of the global economy is robust. When the pulse is weak, there is weakness in the world economy. When the pulse is too strong it may be a sign of either very strong activity or an imminent cardiac arrest (or both). Global trade volumes exploded during the mid-2000s, growing well above the long-run trend (see chart 1). Sure enough, this rapid pulse turned out to be the precursor of a seizure in global economic activity. Global export volumes fell by almost a fifth in the space of about six months from their peak in the middle of 2008. It took almost two years for trade to get back to the pre-crisis peak, but once there trade growth slowed to a disappointingly weak pace. Trade volumes remain about a quarter below the trend that the world enjoyed in the mid-2000s. It is unfair to expect that trend to continue – after all, the recession demonstrated rather well that the previous pace of economic activity was unsustainable. Nonetheless, trade levels still remain notably short of the much more sedate long-run trend. With global trade behind the curve, weak export numbers out of several Asia Pacific economies have been a further sign of worry. Exports of goods from Indonesia, Australia, Taiwan and India are all down significantly on the previous year (in USD terms).
Chart 1: The best of times, the worst of times Global export volume index
220 200 180 160 140 120 100 80 2000 Trade 2002 2004 Long-run trend 2006 2008 Boom trend 2010 2012
Source: CPB Netherlands Bureau for Economic Policy Analysis, UBS Global Asset Management
Singapore, Malaysia and South Korea are not looking that healthy in their exports either. If the Asian export engine is slowing down, Europe is prevaricating while it collapses and the US is about to fall off a fiscal cliff, where does an optimistic investor look for growth? Actually, they keep looking in Asia. Yes, China is slowing down. Yes, some smaller economies such as Singapore have also slowed down. But bear in mind that in China’s case, a controlled slowing should be welcomed. Places that rely on trade, such as Singapore, are bound to see some slowing simply because one of their biggest export markets, Europe, is doing so badly. Against the backdrop of the rest of the world, perhaps investors should be surprised by the robustness of Asian domestic demand growth rather than disappointed by the expected slowing of growth.
A shift away from exports and towards domestic demand in Asia would be very healthy for the world economy. As unpleasant as the recession may have been, it has served a useful function in terms of reducing the scale of the imbalances in the world economy. The caricature of the US spending more than it earns and importing huge amounts from savers in Asia still rings true, but it is only about half as true as it was before the crisis. At the peak of the imbalances, the US deficit was equivalent to about 1½% of world GDP (see chart 2). The deficit is now expected to be half the size this year. The current account surplus in both Japan and non-Japan Asia has similarly shrunk in half. This is the cathartic power of recessions at work.
Chart 2: Balancing act Current account imbalances as a share of world GDP (%), market exchange rates, data for 2012 is IMF forecast
There is no reason to expect the imbalances to go away entirely. After all, some levels of current account imbalance are inevitable and even welcome. For example, a country with an ageing population would find a current account surplus to be welcome because it gives that ageing population a claim on foreign assets in the future to help pay for their retirement (when they will want to run a current account deficit). Also, running a current account deficit that is smaller in magnitude than your rate of GDP growth can be sustainable. If a country is spending more than it earns it is building up debt, but so long as its economy grows faster than its debt the ratio stays affordable. Global imbalances are clearly not everything; it is notable that the Eurozone as a whole has consistently had a broadly balanced current account. Europe’s problem is that the imbalances are within the single currency, broadly with the periphery running a deficit and the core running a surplus. Without their own exchange rate the imbalances within the Eurozone can only really take place through an adjustment in quantity (i.e. less spending on imports). Since global imbalances are now on a more sustainable path than in the past, perhaps markets should not be so worried about the past drop in the level of world trade. Nonetheless, from here on it would be comforting to see trade pick up to a more rapid speed as a sign of ongoing economic activity. At least there is some light on this front – the most recent World Economy Survey from the IFO institute in Germany shows that export growth expectations have rebounded from their earlier post-crisis lows to something more like ‘normal’. This includes an upturn in expectations for Asian exports. In terms of global imbalances, it looks like the places that trade in Asia are not going to trade places with the US anytime soon.
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5
2008 Other DM Other EM
Source: IMF World Economic Outlook (April 2012). Note that the discrepancy exists because of divergences in reporting between countries.
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