Is World Trade Stabilising?
Several indicators suggest world trade growth might be starting to stabilize after a long deceleration. But we would caution against over-optimism as there remain several underlying drags on world trade growth including low growth in the major economies, weak spots in emerging markets, problems in key sectors like cars and semiconductors, and protectionist pressures. Our forecast looks for only a modest upturn in world trade growth this year, to 1.7 per cent from 0.5 per cent, with risks still skewed to the downside.
A sharp weakening in world trade growth was a striking feature of the global economic slowdown in 2019. In October 2019, world trade volume was down around 1.5 per cent year-on-year. This was the worst outcome in a decade and compares with an annual growth rate of 4 per cent a year earlier.
But could the worst now be behind us? Our two in-house trade indicators suggest trade volumes might be starting to stabilise. The coincident indicator for November showed trade growth of around 1 per cent year-on-year, little changed over recent months. But the leading indicator has been more promising in recent months, pointing to world trade growth recovering to around 1.5 per cent year-on-year in the coming months (see Chart 1).
There have also been some signs of improvement in Asia. This region is normally one of the most dynamic for trade but has been severely impacted by the US-China trade war. Monthly data for the final months of 2019 showed exports perking up in China, Taiwan and some smaller economies (see Chart 2). But the improvement wasn’t universal, with Japan and Korea (now hit by their own trade dispute^) looking less upbeat.
^ Japan and Korea entered a trade dispute in July 2019, related to controversy about events during WWII. By December 2019, various trade restrictions contributed to bilateral trade being down around 14 per cent year-on-year
Nevertheless, we would caution against over-optimism. First, the recent uptick in our leading indicator may not last: a similar bounce in late 2018 fizzled out. Second, some of the components of our trade indicators, such as sea freight, export surveys and German industrial orders, still look downbeat (Chart 3). The ongoing weakness in Germany is a particularly negative factor for the eurozone given its important place in European production networks.
There are also still several underlying drags on world trade growth. Economic growth still looks to be decelerating in some of the world’s leading economies including the US, China, the eurozone (where we estimate industrial output fell 1.3 per cent in 2019) and Japan. We expect things to improve as the impact of policy loosening comes through, but slowly. For the US, we forecast import growth in 2020 to be lower than in 2019.
In emerging markets, the news is mixed. Aside from the positive signals already mentioned in Asia, the deep import contractions seen last year in crisis-hit economies like Argentina and Turkey are easing. But this largely reflects positive statistical ‘base’ effects and is being offset by weakness elsewhere; most notably in India, where imports fell around 13 per cent y/y in Q4. The weakness in Indian imports follows sharp slowdowns in the growth of consumer spending and especially investment. Overall, import growth in emerging countries excluding China is still contracting (see Chart 4).
There are also sector-specific drags on world trade. Problems in the autos and semiconductors sectors contributed to weaker trade in goods from early 2018 onwards. These two sectors combined amount to around 5 per cent of world trade (US$900 billion worth). On autos, there are some positive signs, with growth in auto sales and registrations clearly recovering from their trough seen in 2018 and early 2019. Nevertheless, sales growth is barely positive in the advanced economies and still negative in China. There is also tentative evidence that the deep downturn in semiconductor sales is bottoming out, although yearly sales are still falling (Chart 5).
The impact of the US-China tariff war also continues to weigh. Since the start of 2018, bilateral trade has slumped by over 20 per cent, and due to lags between the imposition of tariffs and movements in trade volumes it is likely the full negative impact has not yet been seen, especially on Chinese exports to the US.
The dispute continues to have ripple effects globally. US-China goods trade amounted to around US$660 billion in 2018, or 3.5 per cent of world trade, but indirect effects are also considerable, especially on the further 10 per cent or so of world trade conducted between the rest of Asia and the US and China.
The recent good news in this area was the ‘Phase 1’ trade deal agreed between the US and China in January 2020. But this is likely to boost world trade only slightly. Most tariffs will stay in place, and we doubt that the large extra imports of US goods China has promised will materialise (and to the extent they do, they will largely crowd out other exporters to China). A further deal to substantially roll back tariffs looks unlikely, so high tariffs look set to stay in place for some time.
Overall then, there are clearly some positive developments in the area of world trade. Our trade indicators point to tentative improvements in the months ahead, sector-specific drags are waning, and US-China trade tensions have eased a little. But there are still plenty of negatives, too, and we would say that whatever improvement there has been in the world trade outlook in recent months is limited and fragile. The risks to our baseline forecast, which sees world trade growth picking up from 0.5 per cent in 2019 to a still weak 1.7 per cent in 2020, remain skewed to the downside.