Global Trade Flows Show Exports Are No Magic BulletSimon Kennedy
When HSBC Holdings Plc’s economists from around the world recently pooled their forecasts, virtually all had a similar source of growth in mind for the region they monitored: exports.
The impossibility of every nation being able to sell more than it buys means some of the analysts must be wrong -- unless the rest of the solar system becomes a source of demand for the globe’s products, Stephen King, HSBC’s chief economist, told an Oct. 16 conference in London, flashing a slide of the planets.
“Export claims are just far too optimistic,” said King, a former U.K. Treasury official.
The bet on trade is flopping for companies and policy makers who had hoped it would power recoveries held back by weak domestic demand. This week alone, Caterpillar Inc. and Unilever complained of sliding overseas buying and data showed global trade volumes fell in August by the most since February.
Trade is falling short as emerging markets from Brazil to India slow and the dollar resumes a slide abetted by the Federal Reserve’s maintaining stimulus. The deterioration in cross-border commerce could provoke a response from policy makers eager to protect their expansions and even clashes between them if it endures, said Simon Evenett, professor of international trade at the University of St. Gallen in Switzerland.
“Trade would have picked up much more in a normal recovery,” Evenett said in a phone interview. “The outlook is more of the same as there is much more economic uncertainty than at the start of the year.”
An Oct. 24 report highlighted the issue: The Hague-based CPB Netherlands Bureau for Economic Policy Analysis estimated global trade volume fell 0.8 percent in August, eroding a 1.8 percent jump of the previous month. It was the weakest performance since a 1.1 percent decline in February and left the three-month average lagging its historical pace.
Data from individual countries reflects the gloom. The U.S. trade gap was little changed in August at $38.8 billion as exports fell 0.1 percent and imports barely budged. Chinese exports unexpectedly fell in September and shipments from Taiwan and South Korea also declined. Even with the yen falling this year, the volume of Japanese exports fell last month.
The outlook may only be slightly better next year. The World Trade Organization last month cut its forecasts for trade growth in 2013 and 2014 to 2.5 percent and 4.5 percent respectively, both below the 20-year average of 5.4 percent. The International Monetary Fund reflected such projections two weeks ago when it cut its own forecasts for worldwide economic growth to 2.9 percent this year and 3.6 percent next year.
The trade slowdown stems mostly from developing nations, which had powered the world out of its 2009 recession. The IMF pared its prediction for 2013 growth in emerging economies to 4.5 percent from 5 percent. Some countries, including China, are also trying to rebalance their economies toward greater domestic demand after running up outsized current account surpluses.
Caterpillar, the biggest maker of construction and mining equipment, cut its 2013 sales and profit forecast on Oct. 23. The Peoria, Illinois-based company cited a slump in demand from commodity producers and uncertainties about global growth. Rolling global three-month retail machine sales fell for a 10th month, led by declines in the Asia-Pacific region.
“There are encouraging signs, but there is also a good deal of uncertainty worldwide as we look ahead to 2014,” Chairman and Chief Executive Officer Doug Oberhelman said in a statement.
The next day, London-and-Rotterdam-based Unilever, the world’s second-biggest consumer-products maker, reported the weakest quarterly sales growth in four years. Demand fell in emerging markets, where it generates more than half of its revenue, and failed to pick up in North America or Europe. Revenue growth in developing economies alone slowed to 5.9 percent compared with 12 percent in the same period last year.
All the news isn’t bad. A new leading indicator published this week by economists at UniCredit SpA and based on inputs including activity at Chinese sea ports and in air cargo signals a “significant recovery” in global trade in coming few months.
Even in paring its forecasts, the Geneva-based WTO last month noted “conditions for improved trade are gradually falling into place.” It pointed to an improvement in purchasing managers’ indexes, an easing of the European debt turmoil and recent stabilization in China’s economy.
Policy makers may still be forced to react to protect their economies should exports cease to support expansion. If the dollar continues to decline as the Federal Reserve maintains its quantitative easing program, the Bank of Japan and European Central Bank will be more likely to provide greater stimulus, says Joachim Fels, co-chief global economist at Morgan Stanley in London.
The Bank of Canada already this week noted the lack of an anticipated pick-up in exports as it dropped language about the need for future interest rate increases.
Deutsche Lufthansa AG and LVMH Moet Hennessy Louis Vuitton SA are among the European companies bemoaning the euro’s unexpectedly rally this year. German airline Lufthansa this week cited the euro when its profit estimate fell short of analysts’ forecasts, while Parisian luxury goods-maker LVMH said the currency’s gain lopped 6 percent off third-quarter revenue.
A declining dollar may also antagonize trade partners, rekindling the so-called currency wars of recent years and posing another threat to the world economy, said Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon in London. The dollar has declined 5 percent on a trade-weighted basis since mid-July.
The Bank of Korea is closely watching the rise in the won and will act to curb excessive speculative behavior, Ryoo Sang Dai, director general at the Bank of Korea’s international department, said on Oct. 24. New Zealand central bank Governor Graeme Wheeler yesterday called his dollar “very strong,” although he saw no opportunity to intervene. Reserve Bank of Australia Deputy Governor Philip Lowe said that a “further depreciation” in Australia’s exchange rate would be helpful.
“We suspect that this week we have witnessed the beginning of what may prove to be a sustained period of currency commentary by officialdom,” said Mellor.
Protectionism is also on the rise despite pledges to avoid it by the Group of 20 leading industrial and developing economies, according to Evenett. He estimates 337 measures have been imposed worldwide so far this year after 503 in 2012.
There are nevertheless hopes of new free-trade pacts. Talks are ongoing to create the Trans-Pacific Partnership, an 11-nation free-trade zone linking an area with about $26 trillion in annual economic output. The U.S. and European Union are also discussing a deal; Canada and the EU signed an accord last week.
“You could hope to get a boost to the global economy if you were able to remove a lot of existing barriers or if there was a breakthrough in trade negotiations,” said Andrew Kenningham, an economist at Capital Economics in London. That could all help but it doesn’t seem likely soon.’’