Special Issue Focus - The World Trade Boom Looks to be Over

10.19.18


 

 

 

WORLD TRADE SLOWING ACROSS A RANGE OF MEASURES…

 

World trade growth has supported the global economy over the last two years but has been slowing in recent months. In this article, we survey the latest evidence on trade trends from a variety of sources and introduce a pair of new synthetic world trade indicators. The signals from the new indicators are downbeat, suggesting the risk of a sharp slowdown in trade growth into year-end. This is a worrying backdrop, especially in the context of rising protectionist risks.

Our two new indicators are based on six variables:

  • PMI-type export surveys: Our longstanding Oxford Economics world export indicator, based on such surveys for the U.S., UK, France, Germany, Korea and China
  • Air freight data from IATA
  • The RWI/ISL world container freight index, collating freight data from a large number of global ports
  • German foreign manufacturing orders
  • World copper prices
  • The share price of container firm Maersk, which handles a fifth of world container trade

For each variable, we have run regressions to determine what pace of world trade growth they have historically been associated with. The pace of trade growth signaled by each indicator is then aggregated into two combined indicators. The coincident indicator estimates the current pace of trade growth and the leading indicator estimates the pace in a few months’ time (see notes at the end for full details of the calculations).

Currently, the coincident indicator is pointing to world trade growth running at 2.0-3.0 percent year-on-year, which is well below the 5.0-6.0 percent pace seen at the start of the year. The leading indicator is even more downbeat, suggesting that world trade growth could slow to just 1.0 percent year-on-year by the end of the year. This would take trade back to the low point seen in 2015-16 (see Chart 1).

Looking at the individual components of the indicators, most point to world trade growth slowing in the months ahead, albeit to varying degrees.

The most negative readings come from the RWI/ISL freight indicator and German manufacturing orders. These two variables imply world trade growth may already be running at only 1.0-2.0 percent year-on-year, and worse still, they suggest that world trade could even be declining by the end of the year (see Chart 2). Notably, the RWI/ISL indicator and German orders variables also have relatively strong historical correlations with world trade (around 90.0 percent and 77.0 percent, respectively).

Our two price-based indicators, copper and Maersk share prices, might conceivably give us the most up-to-date signals on trade; both need to be interpreted with caution, given day-to-day noise. However, they have the advantage of being available at very high frequency and were decent steers for the world trade slowdowns in 2015-16, 2011-12 and 2007-08. In the past, false steers from these variables have been largely to the upside (see Chart 3).

Both copper and Maersk share prices have been under pressure recently, with copper prices down about 10.0 percent year-on-year and Maersk share prices more than 25.0 percent lower. As a result, these two price-based indicators also point to rather low growth in world trade in the months ahead, of around 1.0 percent year-on-year.

One source of optimism is that survey-based measures are holding up better. Our export survey-based indicator suggests world trade growth is currently running at a reasonable 3.5 percent annual pace. But even this indicator suggests a slowdown to around 3.0 percent year-on-year trade growth by Q4.

…AS PROTECTIONIST PRESSURES MOUNT

A warning sign from the survey-based measures comes, however, from China. The export component of the Chinese PMI survey slumped in September to its lowest level since February 2016, and pointed to contracting exports.

This may be the first sign of protectionist actions by the U.S. against China showing up in the data. After further rounds of tariffs imposed by both the U.S. and China, high tariffs now cover around two-thirds of their bilateral trade. The effects of this have yet to show up in conventional trade data, but that is not surprising as the latest such data only run to August and will reflect orders placed some time before that. The Chinese export PMI for September suggests that big effects on trade flows might be visible soon.

Meanwhile, the U.S. itself remains a relatively bright spot in the global trade picture. Its import volume growth has strengthened to 6.0-7.0 percent year-on-year, well above the global average, thanks in part to strong fiscal stimulus (see Chart 4).

By contrast, Europe is starting to look like a laggard, with trade growth slipping back to just 2.0-3.0 percent year-on-year. This points to some downside risk to European growth ahead, especially with monetary stimulus set to be scaled back in the coming months (implying less support for domestic demand). The end of the world trade boom could be particularly problematic for Europe, especially for the more export-oriented states, including Germany and some of the smaller European states.

Calculation of the new indicators

We regressed the monthly growth of world trade volume (from the Netherlands CPB) on the year-on-year growth rates of IATA air freight, RWI/ISL container freight, copper, the Maersk share price and German foreign manufacturing orders, and on the level of our export survey-based variable. The regressions suggested the RWI/ISL index explained world trade best. The coefficients from these regressions allow us to associate a given value of each variable with a pace of world trade growth. The coincident and leading indicators are then assembled as the simple averages of the estimated paces of world trade growth, associated with each variable at a given point in time, smoothed by taking three-month averages. Our regressions suggested that the export survey indicator, copper and Maersk share prices lead world trade growth by 3-4 months, while the RWI/ISL index, IATA data and German orders data are coincident with it.

As a result, the new coincident indicator is based on the simple average of the world trade growth rates associated with the current values of the RWI/ISL, IATA and German orders variables as well as the world trade growth rates associated with three-month ago values of the Maersk, copper and export survey variables. This indicator has a very high historic correlation (over 90.0 percent) with world trade. The leading indicator is based on the 6-month annualized trade growth rates of the RWI/ISL, IATA and German orders variables and the current values of the Maersk, copper and export survey variables. 

 


This update was researched and written by Oxford Economics, 121 St. Aldates, Oxford, OX1 1HB, England, as of October 19 2018.