Figures released on Wednesday by the CPB Netherlands Bureau for Economic Policy Analysis confirmed an overall slowdown in global trade for May. This follows a series of disappointing releases, with global trade 3.4% lower in May than it was in December 2014.
Emerging markets the main culprit
The contraction in global trade is largely concentrated in a marked slowdown in emerging markets’ imports. CPB data shows that from emerging markets’ imports are almost 8% lower in May than they were in December 2014.
The main drag has been China, where the widely reported slowdown in growth is taking its toll on import demand. However, the imports squeeze is not confined to the world’s second largest economy; the majority of the largest ‘emergers’ saw substantial falls in imports during Q1 2015. Russia has experienced the biggest contraction in the range of -21%, while Indian imports fell by 8% and Brazil’s by 4.2%.
The picture for emerging markets’ exports is also far from rosy, albeit less pronounced, contracting by 2.6% since December 2014. Chinese exports fell for a third consecutive month in May, but most of the weakness is concentrated to commodity exporters. The big slump in oil and other commodity prices since the second half of last year has led to a significant deterioration in the terms of trade for countries like Russia, Brazil and the Gulf countries.
This means that emerging markets are projected to barely contribute to the growth in world trade this year, meaning that 2015 is expected to be the worst year for global trade since 2001. That is not to say that advanced economies emerge unscathed from the slowdown in developing markets. Both exports and imports for advanced economies are lower in May than they were in December 2014, by 1.5% and 1.9% respectively.
The slowdown in China, the main source of emerging markets’ export demand for advanced economies, is having the largest dampening effect on trade activity, especially for countries like Japan and Germany. However, prospects for advanced economies look considerably brighter in 2015.
Solid but softer Eurozone PMIs provide some optimism
The Eurozone composite PMI released today is showing a softening in activity for the region but remains well entrenched in positive territory and close to its four-year high. This is particularly encouraging given that the data should incorporate the intensification of the Greek crisis in July, suggesting that Eurozone growth looks to be on a firm footing to achieve its highest post-crisis growth rate in 2015.
Still, the Greek crisis looks to have dented confidence in the Eurozone’s two largest economies, Germany and France. This is manifested mainly in business expectations about the year ahead in the dominant services industry which dropped to its lowest seen so far this year. Growth also slowed in Germany and France although merely to 2 and 3-month lows respectively.
Prospects for the Eurozone appear increasingly robust given that the worst of the Greek crisis looks to be over – at least for the next 3 to 6 months. This should provide a partially countervailing dynamic to the deterioration of demand from emerging markets.
Two-speed world trade…reversed
The shift in the growth dynamics of world trade from emerging markets to developing economies also represents an interesting turnaround; emerging markets have kept the wheels of world trade spinning during the financial crisis when demand in the developed world all but collapsed. Now it’s the advanced economies that will need to drive growth in world trade for 2015.
So what does this mean for UK trade?
A pick-up in demand from the UK’s main export market – the Eurozone – spells good news for British exporters. Strong growth in the US, the UK’s second largest market, and an impending Fed rate hike putting upward pressure on the dollar – and making imports cheaper – is also encouraging.
However, the slowdown in China makes things less straightforward, especially given that we are still waiting for the impact of the recent stock market crash to become fully visible. While only 5% of British manufactured products directly travel to China, there is uncertainty about indirect exports mainly via Germany.
All in all, 2015 looks to be a lacklustre year for world trade and we do not expect net trade to contribute to growth in the UK this year either.