One of the features of economic life used to be that the world economy grew and that world trade grew even faster. This was a welcome development albeit one marred by the fact that there is an element of double-counting in world trade called the Rotterdam Effect. Back on the 12th of October I explained the OECD definition of it.
Traditional measures of trade record gross flows of goods and services each and every time they cross borders. This ‘multiple counting’ of trade can, to some extent, overstate the importance of exports to GDP.
I added to that the effect on some countries is very large and the Netherlands is once hence the name.
If we switch from Gross exports to value added then 36% of her exports in 2009 vanished into thin air,which has quite an impact on one’s view of her as an exporter.
Others are on the list as well.
Belgium may be grateful for the phrase Rotterdam effect as otherwise there might be an “Antwerp effect” as 35% of her gross exports vanish using a value added system……Luxembourg. Of its 2009 exports some 59% vanished if we move to measuring value added……….
Also trade figures have all sorts of problems as I pointed out back then and let me illustrate that with an example of a commodity which has been on the move in 2016 which is gold and my own country the UK.
The range of these revisions to the annual trade balance is between negative £5.0 billion and positive £3.0 billion. (announced in the 2014 Pink Book)
Makes you wonder does it not about the accuracy of it all as that money was shuffled from the financial account to the trade one? Time for The Stone Roses.
I’m standing alone
You’re weighing the gold
I’m watching you sinking
Indeed it is time for some revisionism about The Stone Roses as of course these days it would not only be their music which adds to GDP but the drugs too.
There has been some doom mongering in Shanghai already at the G-20 meeting with ABC News summarising it like this.
Global growth is at its lowest in two years and forecasters say the danger of recession is rising. The IMF cut this year’s global growth forecast by 0.2 percentage points last month to 3.4 percent. It said another downgrade is likely in April.
I do like the idea of the IMF being able to forecast economic growth to 0.2%! Regular readers here will of course be thinking it was wrong yet again. Oh and its Managing Director is bleating on about reforms, yes the same reforms that were promised at G-20 in 2014 as Groundhog Day returns. The 2% of extra economic growth will only come apparently if all that hot air reaches a wind farm.
The OECD has been on the case to as well according to Reuters.
Global growth prospects remain clouded in the near term, with emerging-market economies losing steam, world trade slowing down and the recovery in advanced economies being dragged down by persistently weak investment.
This was reinforced by hints of more easing from the People’s Bank of China which is convenient with the G-20 circus being in Shanghai. So let us move on with the mood music being downbeat.
The world trade figures
The Financial Times has been doing some click bait scaremongering overnight.
The value of goods that crossed international borders last year fell 13.8 per cent in dollar terms — the first contraction since 2009 — according to the Netherlands Bureau of Economic Policy Analysis’s World Trade Monitor.
Have you spotted what they have done? They have used the strong US Dollar as a measure of value whereas if you move to volume and the bottom of the article we see this.
Measured in volume terms the picture was not as grim, with global trade growing 2.5 per cent. But that fell below global economic growth of 3.1 per cent, extending a depressing trend in the global economy.
So we do have a concern albeit one of a lesser order that if world trade growth is slowing so presumably is world growth unless something is taking up the slack. Although this is a little awkward as much of it is lower oil and commodity prices which may do just that! what we can say is that trade did fall in November and December as we wonder what happens next.
Even JP Morgan seems to have caught onto the mood music in this area.
Private equity is turning its back on shipping after a glut of funding over the last five years contributed to overcapacity in the industry, according to Andrian Dacy, the head of JPMorgan Asset Management’s Global Maritime business.
This overcapacity has been a contributor to the fall in the Baltic Dry Index as we wonder why JP Morgan is telling people to get out at something of a nadir for it. Furthermore at a time of ever shortening horizons it is very revealing when someone talks of a 25 year time period don’t you think? If we look at its values we see that the BDI has bounced a little recently to 325 but that it a fair bit lower than the 500s of last February and a world away from the 1200s of last August.
If we move on from the BDI wondering how the relative impacts of overcapacity and demand interrelate we can find some help in the calmer waters of the Harpex Index. It covers seven classes of ships and gives us some insight into trade of consumer goods. What it is telling us is that there has been a slowing in this area. The recent peak of of 546 in the early summer of 2015 has been replaced by a drop to 364 where the weekly reading has remained for the last few weeks (okay one 363 ..).
Thus shipping is in a bear market and at least some aspects are in a depression but for the wider economy the picture is muddied and mixed by lower oil and commodity prices.
It is sadly ironic with apologies to Alanis Morrisette that the central bankers who proclaim Forward Guidance are pumping out an atmosphere of fear right now.
The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibrium. For the past seven years, growth has serially disappointed—sometimes spectacularly,
That was Bank of England Governor Mark Carney who at least has not flown out to Shanghai to lecture us again on the risks of global warming. But the man who told us that monetary policy was not “maxxed out” seems to have undertaken yet another U-Turn.
It is a reminder that demand stimulus on its own can do little to counteract longer-term forces of demographic change and productivity growth.
After a few paragraphs of waffle claiming reforms have happened Mark then provides ammunition for critics like me who have long argued that one of the moral hazards of what central bankers have done is as shown below.
In most advanced economies, difficult structural reforms have been deferred.
Well you and your colleagues financed that Mark with your monetary policies. Also we got a confirmation that he plans to push the UK Pound £ lower as he morphs into Mervyn King.
Currencies’ values fell, boosting competitiveness – the exchange rate channel.
Except as Mark gets lost in his own land of confusion this apparently does not work because it is a zero sum game.
But for the world as a whole, this export of excess saving and transfer of demand weakness elsewhere is ultimately a zero sum game.
We also got a confession that my critiques may have hit home, “several commentators are peddling the myth that monetary policy is “out of ammunition.” Is “the only game in town” over?”. Feel free to join the comments section Mark with stuff as shown below so people can reply.
Low interest real rates have bought time by bringing forward demand to today from tomorrow…..However, the effect of QE on the wealth channel cannot last forever.
Also those who remortgaged on the back of his Forward Guidance may wonder about how they lost and the banks gained.
And determined central bank action and forward guidance put a floor under inflation expectations and bolstered sentiment – the confidence channel.
Ah is that the same confidence channel his scaremongering is now undermining or a different one? Oh and what about the banks.
To be clear, monetary policy is conducted to achieve price stability not for the benefit of bank shareholders.
Never believe anything until it is officially denied……..