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World Trade: No Strong Recovery in Sight Yet Raoul Leering Head of International Trade Analysis, ING Amsterdam , June 2016 Summary Causes for the recent slowdown of world trade • Declining value of world trade since 2014; no surprise, given the commodity price crash • The sluggish growth in trade volumes, however, needs explanation. We see three causes: 1. Slowdown of the world economy. This has a disproportionate effect on world trade, because (cyclically sensitive) durable goods are overrepresented in trade 2. Slower growth of greenfield FDI and trade in intermediates, indicating a slowdown in the expansion of global value chains 3. Increasing protectionism 2016-18: Prospects for world trade remain bleak • 1 Trade to grow at around world GDP growth (2.3-2.9%); no acceleration, because: 1. Low growth of the world economy means no stimulus from the economic cycle 2. Free trade is at risk (protectionism, Brexit, TPP not ratified and TTIP uncertain) 3. Expansion of global value chains shows no sign of acceleration 4. Chinese import ratio keeps declining, as rebalancing of Chinese economy continues State Content 1. World trade: State of play 2. Causes of sluggish trade growth 3. Prospects for trade in years to come 2 Causes Prospects State State of play: Where does world trade stand? 3 Causes Prospects State Causes Prospects Declining value of world trade in goods World Trade: nominal and real indices (2005=100) 180 • The decline in the value of world trade is primarily caused by the plunge in commodity prices, especially the oil price crash that started in the summer of 2014. • By volume (real index), world trade declined in 1H15 and again in 1Q16, but has, on balance, increased somewhat over the last couple of years. 160 140 120 100 80 60 40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 World trade nominal index Source: Netherlands Bureau for Policy Analyses (CPB) 4 World trade real index Calculations: ING Global Markets Research State Causes Prospects Goods trade by volume: Positive, but weak growth • Growth of world trade (% change YoY) 15% 10% • The fifteen years running up to the crisis • World GDP growth 5.1% 5% 2.8% 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 2015 1.7% 0% • In 2015, volumes grew only 1.7%, far behind world GDP growth (2.8%). Including services, trade growth is higher, but still lagging that of GDP • Worrisome is that after a recovery in 2H15, trade volumes started to decline again in 1Q16: -1.7% QoQ -5% -10% -15% World Goods Trade Growth Average Growth Goods Trade World GDP growth Source: Netherlands Bureau for Policy Analyses (CPB) 5 Trade volume growth is positive, but very weak compared to: Calculations: ING Global Markets Research State Causes Prospects Globalisation in reverse Worldwide goods imports as a % of GDP 27% • Pre-2008: A steep rise of import ratios in many countries • 2008–11: A steep decline and subsequent recovery of import ratios • Post-2011: A decline in import ratios, which accelerated in 2015 • This shows that the ‘openness’ of the world economy is actually in reverse 26% 25% 24% 23% 22% 21% 20% 19% 18% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: IMF WEO & WTO 6 Calculations: ING Global Markets Research State Causes of the slowdown in trade 7 Causes Prospects State Causes Prospects 1. Emerging markets to blame Average GDP and import growth (% change YoY) 8% • Compared to 1980-2012, the average growth of imports in advanced economies is much lower. • However, growth of imports still outpaces GDP growth. • In Emerging Markets (EMs) we observe the contrary; trade in goods is now growing less than GDP. • This also holds for the most recent figures (1Q16). Thus, EMs remain the leading cause of the decline of world trade. 7% 6% 5% 4% 3% 2% 1% 0% 1980-2012 2013-2015 Advanced economies Import volume growth of goods Source: IMF WEO 8 1980-2012 2013-2015 Emerging market and developing economies GDP growth, constant prices State Causes Prospects Asian trade in lower gear Regional contributions to world import growth • In 2014 and 2015, Europe and the US showed healthy demand for imports. • South America and the Middle East have made negative contributions to growth of imports globally. • Though the contribution of Asia was positive during 2014-15, it has decreased steeply. In 2013, Asia was responsible for 75% of the growth in world trade, versus 20% in 2015. • During 2015 and 1Q16, emerging Asian economies were the most dominant factor behind the declining volumes of world trade. 6% 5% 4% 3% 2% 1% 0% -1% 2011 Source: WTO 9 2012 2013 2014 2015 Europe North America Asia South and Central America Middle East and others World State Causes Prospects EMs: from lifebuoy to a drag on world GDP growth Real GDP growth (% change YoY) 8% • The difference between real GDP growth in Emerging Markets (EMs) and Developed Markets (DMs) has declined sharply. • DMs are no longer supressing world GDP growth. Nowadays, EMs have taken up that role; GDP growth rates are declining. • Hence, EMs are no longer the ‘lifebuoy’ of world GDP growth. 6% 4% 2% 0% 2008 2009 2010 2011 2012 2013 2014 -2% -4% GDP Developed Economies Source: Netherlands Bureau for Policy Analyses (CPB) 10 GDP Emerging Economies 2015 State Causes Prospects Investments in emerging Asia, especially, are curbing imports… Investments as a % of GDP 45% • The decline of GDP growth in EMs is an important reason for the slowdown in world import demand. • Especially worrisome is that the investment ratio in emerging Asia is declining. 40% 35% 30% 25% 20% 15% 10% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: IMF WEO 11 State Causes Prospects …because imports are strongly related to investments World growth of real imports, real investment and real GDP (% change YoY) 15% • The chart shows that trade is more closely related to investments than to GDP. • This is because 70% of (nonenergy) world trade consists of trade in durable goods. Capital goods for investments make up a significant part of trade in durable goods. • China is one of the EMs where imports are declining. 10% 5% 0% 1998 2000 2002 2004 2006 2008 2010 2012 2014 -5% -10% -15% Real imports Source: IMF WEO 12 Real investment Real GDP at market exchange rates State Causes Prospects Less Chinese imports of intermediates and capital goods Chinese import growth (% change YoY) 35% • Much lower growth in Chinese demand for capital goods and intermediates since 2010. • The Chinese import slowdown is not only cyclical, because: 30% 25% 20% • 15% • 10% 5% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -5% Capital Source: IMF WEO & UNCTAD 13 Primary intermediate Other intermediate A structural shift to domestic suppliers for intermediates. Rebalancing of the economy away from exports and investments, towards consumption, meaning a shift from the high import content of exports and investments towards the lower import intensity of consumption. (Consumption goods account for only 5% of imports). State Causes Prospects Other emerging markets show the same pattern… Emerging market import growth, excluding China (% change YoY) 35% 30% 25% • 20% 15% 10% 5% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -5% -10% -15% Capital Source: IMF WEO & UNCTAD 14 Other intermediate Primary intermediate 2014 Imports of capital goods, in particular, have taken an even bigger hit in EMs other than China. State Causes Prospects …partly due to the crisis faced by commodity exporters Capital goods import volume index (% change YoY) 40% • Within these other EMs, commodity-exporting countries are playing a significant role in the slowdown of import growth of capital goods. • The commodity price crunch has led to less import demand for capital goods from oil-exporting countries. • But it’s not only commodity exporters that are importing less. • Other EMs, like Asian economies outside of China, are also importing less. • So, what else is going on? 30% 20% 10% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -10% 2013 2014 -20% Others Source: UN Comtrade, IMF & World Bank 15 Commodity exporters State Causes Prospects 2. Global value chains: Lower greenfield FDI… 35% 32% • Could it be that the expansion of global value chains is slowing down? Is offshoring losing ground to re-shoring? • Diminishing greenfield FDI flows to developing economies in 2015 seem to indicate this. • But, greenfield FDI is a blurred indicator of global value chains. Greenfield FDIs, with the purpose of setting up new offshoring locations to take care of part of the production process, lead to a lot of imports and exports of intermediates. 30% 25% 20% 15% 10% 8% 5% 1% 0% -5% -4% -10% Source: UNCTAD 16 World Developed Economies 1% 8% Developing Economies -4% Transition economies 32% But, greenfield FDIs are also made to sell products in the local market. If so, these can be substitutes for exports instead of being a stimulus. State Causes Prospects …lagging trade in intermediate products World imports of intermediate products and all imports (2004=100) • 200 190 180 The worldwide slowdown in the growth of imports of intermediates also suggests that the expansion of global value chains is slowing down. 170 160 150 140 130 120 110 100 2004 2005 2006 2007 2008 Total goods import Source: WTO 17 2009 2010 2011 2012 2013 2014 Total intermediate imports Calculations: ING Global Markets Research State Causes Prospects China leads the way in this slowdown Chinese imports of intermediate products and all imports (2004=100) 350 • Chinese import demand for intermediates is slowing. • This is not only because China is increasingly using domestic suppliers. • The rebalancing of the Chinese economy away from exports/industry, towards consumption/services, means reduced imports of intermediates. 325 300 275 250 225 200 175 150 125 100 2004 2005 2006 2007 2008 Total goods import Source: WTO 18 2009 2010 2011 2012 2013 2014 Total intermediate imports Calculations: ING Global Markets Research State Causes Prospects 3. Trade liberalisation losing out to protectionism Number of implemented trade measures 800 • Another reason for the slowdown in trade is: Protectionism. • Over 500 protectionist measures have been implemented in 2015, compared to just 200 liberalising trade measures. • This does not only hold true for 2015. In each year since the start of the financial crisis in 2008, protectionist measures have outpaced liberalising measures. 700 600 500 400 300 200 100 0 2009 2010 Total Source: Global Trade Alert 19 2011 2012 Discriminatory 2013 2014 Liberalising 2015 State Causes Prospects Products responsible for trade fall hit by protectionism Trade measures that are protectionist (as a % of total) 80% 70% • There is a clear relationship between product groups that contributed most to the fall in trade in 2015 and those hit most by protectionism. • Product groups (excluding commodities) that are each responsible for at least 1% of the decline in trade (by volume) from 2014 to 2015 are hit almost twice as hard by protectionism than the average for manufacturing goods. Export taxes 60% 50% Public procurement 40% 30% 20% Import restrictions 10% 0% All manufacturing Source: Global Trade Alert 20 Between 0.5% share and 1% share More than 1% share Where is world trade heading? Cyclical and structural drivers look weak 21 State Causes Prospects Cyclical: Trade suffers from economic weakness Low economic growth has a disproportionate negative effect on trade 5% 4% 3% 2.3% 2% 1% 0% -1% -2% ING forecasts slower 2016 GDP growth in: • The US: 2.4% in 2015 to 1.6% in 2016 • China: 6.9% to 6.5% • UK: 2.3% to 1.8% • Japan: still-low growth (0.5%) • The Eurozone hardly compensates: 1.4% to 1.6% • Russia exerts less drag on the world economy, but is still shrinking (-1.7%) Investment picture looks rather bad • Negative investment growth in the US/UK • Only modest recovery in the Eurozone • Flat investment profile in Japan • China: negative structural trend -3% Source: IMF & ING 22 Calculations: ING Global Markets Research State Causes Structural: Unfavourable tide, but one bright spot Many negative factors for trade: 1. Free trade at risk 2. No signs of accelerating expansion in global value chains 3. China’s shift away from investments to continue A positive one: • Rising commodity prices push up import values and volumes of commodity exporters 23 Prospects State Causes Prospects 1. Free trade at risk: EU under pressure BREXIT: • Vote to leave EU can hurt British and EU trade and creates risk of more EU countries leaving the EU TPP/TTIP/Bali: • TTIP: Little public support makes closing any deal with the US difficult • TPP: Positions taken by US presidential candidates make ratification of TPP uncertain • Bali: 31 countries yet to ratify, before Bali agreement can be implemented Refugee crisis: • Reestablishment of border controls 24 State Causes Prospects 2. No signs of renewed momentum for global value chains Greenfield FDI in EMs may continue, but not accelerate, due to: • Subdued investment activity of enterprises in developed markets • Threat of barriers due to political instability/protectionism 25 State Causes Prospects 3. Chinese imports: Growth will not return to pre-crisis levels Development of Chinese goods imports as a % of GDP 35% 30% • 25% 20% 15% 10% The shift away from export- and investment-led growth in China, towards consumption-led growth, had already started to reduce the import intensity far before the start of the financial crisis. The export industry uses many imported intermediates, while consumption is less dependent on imports 5% 0% 2000 2002 Source: IMF & WTO 26 2004 2006 2008 2010 2012 2014 Calculations: ING Global Markets Research State Causes Prospects A positive: Rising commodity prices stimulate imports ING commodity price forecasts 20 70 • ING expects the oil price to increase to US$65/bbl in 2017, driven by a significant reduction in the oversupply of oil and rising demand from China and other countries. • Despite a recent setback, ING estimates that prices of metals like iron ore , aluminium and copper will rise further this year and next. • As fuels and mining-related products make up 15-20% of total world trade, these price increases are good news for the value of world trade. • Hence, trade, in value and in volume terms, can increasingly benefit from rising commodity prices, this year and next. 60 18 50 16 40 14 30 12 20 10 10 8 0 ICE Brent (US$/bbl) (RHS) LME Cu (1000s US$/mt) (RHS) LME Al (1000s US$/mt) (LHS) Platinum (100s US$/oz) (LHS) Calculations: ING Global Markets Research 27 State Causes Prospects ING’s baseline expectations for world trade 1. World trade (in goods) will grow at around the world GDP growth rate (2.3-2.9%) during 2016-18 2. Nominal trade will grow a bit faster, especially from 2017 onwards 3. But, no sign of a return to trade growth outpacing production by any significant amount 28 State Causes Risks to the baseline scenario: Mainly downward Downside risks: • Political (Brexit, European refugee crisis, Grexit and US politics) • Stronger slowdown of the world economy • Return of volatility in financial markets • Another drop in commodity prices Upside risks: • European growth • Recovery in China • Trade agreements going ahead 29 Prospects Contact information For further information, please contact Raoul Leering Head of International Trade Analysis General Market Analysis ING Bank [email protected] Telephone: +31 6 133 03 944 A special thank you to intern Marco Loonstra, who assisted in compiling this report 30 Disclosures ANALYST CERTIFICATION The analyst(s) who prepared this presentation hereby certifies that the views expressed in this presentation accurately reflect his/her personal views about the subject securities or issuers and no part of his/her compensation was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this presentation. 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