Forget the tariff war, global trade is slowing anyway

Posted May 27, 2018 12:03:27

Photo: Global trade volumes have been falling in recent months. (Reuters: Aly Song)

While the on-again, off-again threat of an all-in trade war continues to grab the headlines, a more subtle shift is pointing to the brakes being applied the global economy.

A number of important measures of international trade have suddenly weakened.

As well, industrial activity as measured by purchasing managers' surveys (PMIs) have backed up the idea the so-called synchronised growth spurt is starting to look like a synchronised slowdown.

Data just published by the respected CPB Netherlands Bureau for Economic Policy Analysis found world trade volumes fell by 1.1 per cent in March.

The contraction was broad-based with both emerging and advanced economies reporting falls in export volumes over the month.

On top of that, the CPB also revised up the size of the fall reported February.

Capital Economics global economist Nikita Shah says alternative measures of world trade have also become even less encouraging.

"In recent months, growth in air freight traffic has continued on the downward trend which began in the middle of 2017," Ms Shah said.

"What's more, the pace at which sea container traffic is expanding has slowed from around 6.5 per cent [year-on-year] in February to 3.5 per cent in April."

Photo: The volume of goods globally traded has been falling in recent months. (Supplied: Capital Economics, CPB )

Things have also cooled in the industrial heartlands of most advanced economies, the US being one notable exception.

New export orders in European manufacturing PMIs have been slipping for months and are likely to fall further in May.

Flash, or preliminary, PMIs softened, a result expected to be confirmed with the official releases across major economies this week.

Weaker export orders are a pretty good forward indicator of weaker global trade.

Photo: Weak PMI export orders point to further deterioration in global trade. (Supplied: Capital Economics)

Things might be cooling, but Ms Shah said it doesn't mean they are collapsing.

"While the new export orders component of the global manufacturing PMI has fallen sharply, it is still consistent with exports growing by a reasonably strong 3 per cent over the year," he said.

However, negative risks — such as the resumption of trade hostilities between the US and China, as well as the far from smooth renegotiation of North American Free Trade Agreement — far outweigh the potential for positive surprises.

"We doubt that the agreement which the US has apparently reached with China to avert a trade war will mark the end of trade tensions between the two countries," Ms Shah said.

"This 'deal' is likely to have little impact on the US-China bilateral balance and does little to address concerns over China's protection of intellectual property rights.

"As such, trade tensions will probably resurface in the coming months."

Local impacts

This does not totally accord with the Reserve Bank's fairly rosy view of the global economy.

"Global economic conditions were relatively strong in early 2018 and the drivers of growth have become more broad-based," the RBA said in its most recent quarterly statement on monetary policy.

Many of its projections are based on growth in Australia's trading partners "to continue to exceed estimates of potential" over the next few years.

ANZ's head of Australian economics, David Plank, says the loss of momentum suggests the downside risks to global growth are rising.

However, he is remaining more alert, than alarmed about the potential impact here.

"The shift in global industrial production growth often doesn't provide much of a guide to the performance of the Australian economy," Mr Plank said.

"We'd need to see a significant slowdown in the growth of our major trading partners to materially negatively impact Australian growth."

However, Mr Plank said it is reasonably clear that the global cycle has passed its maximum point of growth.

"At the very least this reduces the prospect of significant upside surprises for Australia's GDP growth," he said.

In other words, the RBA's ambitions to lift interest rates off their historic lows disappear further over the horizon.

Investors bail on risk

In the more short-term world of financial markets, falling oil prices, renewed fears about Europe crumbling and confusion over the US-North Korea summit dragged things down.

Friday's losses on Wall Street were not heavy, but enough to push US equities down 0.3 per cent over the week.

Europe was a fair bit shakier, down 1.3 per cent for the week, while ASX fell almost 1 per cent.

It faces further losses on Monday's opening.

The energy sector's 3 per cent fall was the biggest weight on Wall Street's session.

It was hardly surprising given the news Saudi Arabia and Russia were in talks to lift oil production by about 1 million barrels a day.

Photo: The oil price slipped on news Saudi Arabia and Russia are in talks to boost production again. (Reuters: Sergei Karpukhia)

OPEC secretary-general Mohammad Barkindo said the move to boost supplies resulted from a White House tweet last month that OPEC had "artificially" boosted oil prices.

"We pride ourselves as friends of the United States," Mr Barkindo said at a meeting of oil producers in Russia.

The extra production would represent more than half the 1.8 million barrels a day of the cut OPEC and Russia put in place to clear the global oil glut and lift prices.

While OPEC and Russian producers have been big winners by throttling back supplies and surging, US producers have not been far behind.

But it appears discretion may be the better part of profit taking.

The supply squeeze is likely to tighten as Venezuela's problems only seem to get worse and the reintroduction of US trade sanctions on Iran will soon remove another couple of hundred thousand barrels a day from the market.

Italy, Spain and Turkey fears

It has been a while since markets had a decent European crisis to fret about, but there certainly appears to be something bubbling up.

Italy and Spain have been jostling to see which nation can cause the most disquiet.

Italy has been the frontrunner since the recent election put a distinctly problematic — from the markets' point of view — coalition in the box seat to run the country.

While a government is yet to be formed, it looks certain to be made up of the nationalist, right wing League and the more politically ambiguous, anti-establishment and anti-european 5-Star movement.

Ahead of a cabinet being formed, the credit ratings agency Moody's foreshadowed a possible slashing of Italy's debt rating.

At the heart of the markets' and credit rating agencies' concerns is a platform of cutting taxes and increasing spending in an already heavily indebted economy.

The likely appointment of an 81-year-old euro-sceptic economist, Paolo Savona, as finance minister has done little to ease the markets' concerns.

Photo: 5-Star party supporters rally in Rome ahead of the March 4 elections. (Reuters: Tom Gentile)

Further west, Spain's socialist opposition ended a week of turmoil by filing a no-confidence motion against Prime Minister Mariano Rajoy in the wake of a kickbacks-for-contracts scandal.

Still some way short of forcing a spill, it still sent Spanish stocks and bond prices plummeting.

About the only place in the region making Spain and Italy appear stable at the moment is Turkey.

The currency there has crumbled ahead of snap poll called by President Racep Tayyip Erdogan, who is seeking sweeping new powers, including the ability to set the country's interest rates.

The turmoil saw investors flee and the Turkish Central Bank jack up interest rates from 13.5 per cent to 16.5 per cent on Wednesday.

Some market watchers see it closer to 20 per cent in the next few weeks.

The mounting political anxieties along the Mediterranean coast sent investors fleeing in search of less risky environs.

That meant money flooded back into US Treasuries on Friday, sending yields down to three-week lows.

While all this is only causing ripples in broader markets so far, the growing volatility coupled with what appears to be a slowing global economy is not exactly a comforting mix.

Capex spending expected to be flat

Photo: Non-residential construction has been weak and is expected to weigh down business investment data. (ABC News: Michael Barnett)

The Australian economic calendar is looking a bit busier this week with another of the key pieces of the first quarter GDP puzzle being put in place.

First-quarter business investment, or capital expenditure, data (Thursday) is expected to show a modest rise at best, although that is certainly better than the deadweight it has been as the mining construction boom rolled over.

ANZ's Daniel Gradwell is a bit lower than the consensus suggesting capex will hardly rise at all over the quarter.

"We expect the key input to GDP from the release — plant and machinery spending — to record solid growth, although the softness in non-residential building is expected to weigh down the headline number," he said.

Of more interest will be companies' spending plans into 2018/19.

While the survey was taken in the first quarter when things looked a bit rocky, the respected NAB business survey finds conditions and confidence at pretty robust levels.

The consensus view is that spending intentions should rise by about 8 per cent to $90 billion, which would be a solid enough rebound.

Building approvals (Wednesday) are expected to fall, offsetting the bounce in March, but still remain around 5 per cent higher over the year, while CoreLogic's home price index (Friday) is expected to show prices fell again in May.

Private sector credit (Thursday) is likely to slow, dragged down by a loss of appetite for investor loans and business lending unlikely to hold on to earlier gains.

US jobs and inflation

From a global perspective, US employment and inflation figures hold the greatest interest this week.

Core PCE, the Fed's preferred inflation measure, is expected to rise a subdued 0.1 per cent over May and 1.8 per cent over the year (Wednesday).

Hardly the sort of number to fires up expectations that interest rates need to jacked up, but the expectation is it is on the move nonetheless.

Job creation is expected to be solid, but the most important number may be wages growth (Thursday).

It disappointed in April, up just 0.1 per cent for the month. Another weak month may be welcomed by the market, but perhaps not workers and consumers.

The final iteration of US Q1 GDP (Wednesday) is expected to see growth dialled down from 2.9 per cent to a more sedate 2.3 per cent.

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