Should we worry about global trade?

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Data released today on world trade and flash PMIs for the eurozone and China provide us with a good indication of what to expect from global growth in q3 2015; which is to say not an awful lot. Global trade data disappointed once more, while flash PMIs for the eurozone came slightly on the weak side. Unsurprisingly, the China Manufacturing PMI continued its slump, signalling that concerns over a slowdown in its real economy are far from unfounded.

 

World trade dwindling

Earlier today the CPB released world trade figures for July. The data showed a 0.4% month-on-month deterioration after growing by a solid 2.6% in June. In our Week Ahead blog on Monday we highlighted our expectations for a poor outturn in July given the re-escalation of the Eurozone crisis and the stock market crash in China.

Taking a longer-term series to cut through monthly volatility in the data, world trade volumes in the six months in July were 1% lower compared to the previous six months. The small decline could show resilience in global trade volumes in the face of considerable headwinds from the slowdown China and its rippling effect on other emerging markets.

Still, we expect the majority of the impact of these headwinds to manifest itself over q3, where the July data points to a poor start to the quarter. What is more, global deflationary pressures are seriously hurting the value of global trade which has deteriorated by 14% in the six months to July 2015 compared with the six months to July 2014.

 

Eurozone PMIs point to modest but steady growth

Flash eurozone PMIs released today show a modest, but solid, picture for growth prospects in the UK’s largest export market. The Composite Eurozone PMI fell to 53.9 from 54.3 in August – a two-month low – but still remains firmly rooted in expansion territory.  

Encouragingly, the data looks to have shrugged off concerns about China, coming only slightly on the weak side.  The German PMI closely tracked this overarching trend, with output growing, but dipping to a 2 month low. On the other hand, the France PMI jumped to a 2 month high, while the Manufacturing PMI finally entered expansion territory after hovering below the 50 mark for 14 out of the 15 last months.

 

China PMI tanks

The Flash China CAIXIN Manufacturing PMI dipped to 47.0 in September – a staggering 78-month low. The September data rounds off a poor q3 for manufacturing in China which points to a contraction in real output. A lot of uncertainty remains around how deep the slowdown in China really is and how seriously it will undermine global growth. Official data from China in the coming months will be under close scrutiny as analysts attempt to gauge the magnitude of this drag on the world economy.

 

 

Impact on UK manufacturing

 

Global headwinds emanating predominantly from the slowdown in China have been dragging on UK manufacturing. Uncertainty in global markets topped with domestic pricing pressures and subdued oil & gas activity have led us to halve our forecast for manufacturing output growth in 2015 to 0.7%.

 

A good chunk of this weakness is concentrated on the exports side, where in our q3 Manufacturing Outlook manufacturers saw orders from overseas falling sharply and margins further squeezed. The majority of our members have highlighted their concerns over the situation in China; most have not yet seen a direct impact on their export sales to China but the uncertainty generated in global markets is weighing on their confidence.

The differing fortunes of China and the eurozone in today’s data are also reflected in manufacturers’ outlook for export demand. British manufacturers have seen a notable pick-up in demand from the Eurozone, albeit from a low base, while demand from Asia has been progressively tailing off.

 

Outlookq3Xdemand 

All in all, concerns over China have come on top of an already challenging exporting environment for UK manufacturers. As such, we do not expect export orders to make a solid rebound this year nor net trade to contribute positively to UK GDP in 2015.

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