Trade slowdown coming at worst time for world economy, markets
LONDON (Reuters) – The warning signs are multiplying and becoming clearer: global trade growth is slowing, which will pose an increasing threat to the world economy and financial markets next year.
Cross-border commerce is in its poorest health since the Great Financial Crisis 10 years ago, or even in decades, depending on which measure you look at, and the incoming data point to further deterioration next year.
In the last week alone a batch of figures from economic and exporting powerhouses in Asia, including China, showed that global trade is losing steam. And it couldn’t be coming at a worse time for investors.
Wall Street and stock markets around the world are falling. Major names in tech (Apple) and banking (Goldman Sachs), sectors that are pivotal to the global flow of goods and services and which had led the market boom of recent years, are among the biggest losers on the way down.
Auto sector stocks, among the most exposed to cross-border and cross-continent commerce and supply chains, have been particularly volatile and vulnerable this year to the (mostly negative) newsflow on tariffs and trade.
According to Citi, the volume of global exports anticipated in the next six months is contracting, and at the fastest pace since 2008-09. Alarmingly, this leading indicator is extremely well correlated with global trade growth.
Economists at Oxford Economics lowered their forecast for world trade growth in 2019 earlier this year by more than 1.5 percentage points to 4 pct. The festering U.S.-China trade war could result in cumulative global GDP losses of 0.7 pct next year and 1.0 pct by 2020, they add.
In an updated paper published in “Our World In Data” in October, Esteban Ortiz-Ospina, Diana Beltikian and Max Roser noted that the value of exports as a share of global GDP fell three years in a row from 2011-14. The level of contraction is small, by roughly 1 percentage point to 24.12 pct, but the direction of travel is cause for concern.
“There is a correlation between economic growth and trade: countries with higher rates of GDP growth also tend to have higher rates of growth in trade as a share of output,” they concluded. “The empirical literature suggests that increased trade causes higher economic growth.”
Whether that growth is shared even remotely evenly or fairly is another question. But the ripples from slowing trade growth or even contraction would be widely felt.
World Bank figures show that trade as a share of global GDP has fallen for four years in a row. There have been steeper declines, such as 2008-2009, but this is currently the longest downturn since at least 1960.
This week, South Korea’s government cut its 2019 growth outlook to 2.6-2.7 pct, which will be the lowest since 2012, and data showed Indonesian exports for November falling off a cliff. China’s exports in November rose 5.4 pct year on year, roughly half of economists’ consensus forecast and a third of the previous month’s 15.6 pct.
There’s no shortage of flashpoints in the global trade war, the most significant being the US-China front. Washington and Beijing have agreed a 90-day truce, but if a deal can’t be reached, then existing 10 percent tariffs on U.S. imports from China would go up to 25 percent.
Does history offer any clues as to what we can expect next year?
Analysts at Oxford Economics note that, the 1930s aside, trade skirmishes usually have a limited impact on global growth and asset markets. But when it opens up, the downside can be steep.
The four most recent major global trade disputes they cite – one in agriculture (1982-86), two around steel (1983-84 and 2002-03) and one on tyres (2009-12) – coincided with falling equity markets around only one of them. But it was a savage 19 pct correction, in 2002-03.
In the other three, stocks rose. The behaviour of GDP growth was a little more mixed, although overall, still positive. But trade growth was more severely affected, which undoubtedly constrained the broader economic expansion.
The outlier is the 1930s and the Great Depression, when protectionism was also accompanied by banking crises, stock market collapse and severe recession. Even allowing for the unique confluence of events and forces back then, the 1930s prove that once a trade dispute starts, escalation can be a lengthy process.
Protectionist measures contributed to a 30 pct slump in world exports in 1929-1932. The ratio of world trade/world GDP fell to 10 pct in 1932 from 19 pct in 1929. Even into the late 1960s, this ratio was only modestly higher than in 1929.
“High tariffs created large business interests in favour of protectionism, meaning tariff momentum can build,” Oxford Economics warns.
With Trump calling himself “Tariff Man” only last week, investors should buckle up for a bumpy ride next year.