The last few days have seen various shock waves pass through word financial markets. We have seen equity markets fall and currencies gyrate at a speed not seen for a while as we reach a stage where fear is more powerful than greed. However if we look below the surface there is a factor which has developed in 2015 which is troubling. Let me open this section with the thought that one of the accepted axioms had become that world trade expanded at a faster rate that world economic growth. Why? Well it can be summed up in one word which is globalisation. This is supposed to bring all sorts of benefits such as lower costs and increased efficiency as well as more choice.
World Trade Monitor
This undertakes monthly surveys of the state of play and the latest one is reviewed by the Financial Times thus.
The volume of global trade fell 0.5 per cent in the three months to June compared with the first quarter, the Netherlands Bureau for Economic Policy Analysis, keepers of the World Trade Monitor, said on Tuesday.
Okay so if trade growth exceeds output growth then we have a problem so let us look deeper.
Economists there also revised down their result for the first quarter to a 1.5 per cent contraction, making the first half of 2015 the worst recorded since the 2009 collapse in global trade that followed the crisis.
So we are going from bad to worse or as Madonna might say “Deeper and Deeper”. The Financial Times points out that this does have implications for world economic output.
In the three months to June, global trade grew just 1.1 per cent from the same quarter of 2014, according to the new Dutch figures. The International Monetary Fund expects the global economy to grow 3.5 per cent this year.
So the falls in 2015 have dragged the growth rate down but official bodies continue on with a rose-tinted view.
“We have had a miserable first six months of 2015,” said Robert Koopman, chief economist of the World Trade Organisation, which has forecast 3.3 per cent growth in the volume of global trade this year but is likely to revise that estimate down in coming weeks.
Have we seen that sort of thing elsewhere at all as official bodies sing along to “Reality was once a friend of mine?”
If we look at the data we see that world trade peaked at 139.5 last December and that compares to 2005=100 but it fell to 136.8 in June. In fact June was a relatively strong month but the overall trend was down as we wonder what happened in July and so far in August. The areas driving this are Emerging Asia (-5%) which is in tune with the theme of these times and Central and Eastern Europe (-13%) which is much more of a surprise as it was down by 4% up to the end of May.
In case you are wondering why the Dutch are recording this then think of the amount of trade which flows through Rotterdam. I wrote a piece when I was on Mindful Money on the subject of the “Rotterdam Effect” where there is in my opinion some double-counting which flatters their economy.
Also I think that the FT is going a little far with the emphasis on 3-D printing.
The slowdown in global trade has led some to proclaim that globalisation has peaked with technological innovations such as 3D printing creating more disruptions.
What about shipping?
This is another way of looking at trade trends as we get a clue from the cost of shipping or the demand for transportation. Earlier this month there were diverging views on the subject. From the Australian Daily Reckoning.
Tanking Baltic Dry Index Foreshadows a Global Recession
But only a day later there was this from The Economic Times of India.
The Baltic Exchange’s main sea freight index, which tracks rates for ships carrying dry bulk commodities, rose to a new 2015 high on Monday thanks to strong demand for capesize vessels
Ah so it was simultaneously rising and not only falling but tanking?! If we look at it now then we see that it is at 942 which is some 11% lower than this time last year and has seen quite a fall since the 1222 of the 5th of this month. In current circumstances the latter move is no surprise but it remains a fair bit higher than the drop towards 500 it saw in February as the impact of falling oil and commodity prices hit it with full force. So there was quite a rally which has now reversed.
Another measure is the Harpex Index from Harper Peterson which is another amalgamation of freight shipping rates. It too rose in 2015 and reached a peak of 646 in mid-June but since then the situation has deteriorated and the reading on the 22nd of this month was 550 for a fall of 15% from that peak.
For perspective the Harpex is up on a year ago (411) but a long way short of the peak of wait for it 1649 which preceded the credit crunch.
We do get occasional up to date snapshots and there is this from Platts yesterday.
Freight rates for Panamaxes loading in the UK Continent are currently at the lowest level since late 2013 due to weak regional demand for the vessels in the Baltic and UKC, as well as an unsupportive Panamax environment in the Caribbean.
Although shippers are at least able to load up with fuel that is cheaper than it has been for quite some time.
Ex-wharf Singapore 380 CST bunker fuel plunged to its lowest level in more than 10 years, tracking plunging crude and fuel oil Monday.
The grade was assessed at $208/mt Monday, down $19/mt from Friday. It was last assessed any lower at $207.50/mt on March 2, 2005, data showed.
The new data suggests that world trade growth went into reverse in the first half of 2015. If we look at what shipping rates have done since then we see that both bulk dry (BDI) and container (Harpex) rates have fallen sharply in August. Thus we have a hint that the decline in world trade may have not only continued but grown. It does not prove that world economic output has also dropped but in terms of the Starship Enterprise it does put us on Yellow Alert and it also provides a theoretical backdrop to some extent to what has unsettled financial markets so much.
It is not only physical trade which has issues as we have the ongoing issue of banking deleverage or shrinking and I am reminded of a speech on this subject given by Kristin Forbes of the Bank of England last November.
International capital flows are sharply lower than before the crisis, and international financial exposures are somewhat lower. Home bias is greater. This recent financial deglobalization is driven by a massive contraction in international banking flows – in which the UK plays a critical role. Not only have UK resident banks withdrawn more cross-border lending than any other banking system, but other countries’ banks have reduced their cross-border lending exposure to the UK on a scale that is large even when measured relative to the scope of the UK economy.
Has that finally impacted on financial markets?
It would appear that Mark Carney’s promises and hints of an interest-rate rise have had an impact. From the UK BBA.
“These figures show that thousands of us managed to tear ourselves away from the Ashes series to remortgage during July.
“This was a 29% surge on 12 months before and the highest figure we’ve seen for four years. Savvy homeowners are snapping up competitive deals before an expected increase in interest rates.
How is that going Mark?