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Nouriel Roubini's Global EconoMonitor

RGE Wed. Note: Renewed Risks and Multi-Speed Global Recovery to Restrain World Trade Flows

In this week’s note, we take a look at trends in global trade. The following is an updated excerpt from a recent RGE Analysis, “Trade Outlook Update: Multi-Speed Global Recovery to Restrain Flows,” available for clients at Roubini.com.

After bottoming in Q2 2009, world trade volumes have grown steadily since H2 2009, with momentum continuing into early 2010. Emerging markets (EMs) are driving the trade recovery with their imports approaching the 2008 peak. In early 2010, emerging Asia’s exports and imports crossed their 2008 peaks as regional domestic demand, inventory restocking in Asia and abroad, and Chinese commodity demand boosted intra-Asia trade. Domestic demand has fueled a sharp rise in LatAm imports while its exports approached the 2008 peak, helped by strong commodity exports and reviving U.S. demand. The Middle East and Africa’s trade has also revived decisively, whereas deleveraging and fiscal austerity are weighing on Central and Eastern Europe’s trade. While Asian demand has supported Japan’s exports, U.S. and eurozone exports and imports are still over 10% shy of their 2008 peak due to a slow recovery in domestic consumption.

Global inventory restocking, reviving global electronics cycle, strong food and commodity prices and fiscal stimulus spending, especially on infrastructure, have boosted global trade in intermediate, capital and consumer goods as well as infrastructure and industrial commodities, disproportionally benefiting EMs that have increased domestic demand and imports for re-export. After plunging in 2009, investment is recovering due to strong government investment and improving capex in EMs and advanced economies.Replacement of capital and fiscal incentives for capex and automobile purchases are boosting global trade in capital goods, automobiles and auto parts and components.

But trade volumes were still 7.0% below their 2008 peak as of early 2010, according to the CPB Netherlands Bureau for Economic Policy Analysis. Global trade recovery has lagged that of global GDP and industrial production due to feeble demand in the U.S. and EU (27), which account for about 50% of global imports. This in turn has affected intra-EU trade, which accounts for two-thirds of total EU trade, as well as intra-Asia trade, 40-50% of which is re-exported to the U.S. and Europe. And now, debt crisis and fiscal austerity in the eurozone and potential trade and financial contagion to the rest of the world threaten to stifle the global trade recovery in 2010 and increase protectionism and trade finance costs.

Aggressive fiscal cutbacks in periphery eurozone countries have arrived earlier than expected, which—along with a weak euro—are likely to reduce the EU’s import demand starting in 2010. This will affect global trade in consumer and capital goods since the EU accounts for nearly 40% of global imports and is a key export destination for the world’s major economies. The euro weakness will boost EU exports, especially those of competitive countries like Germany and the Netherlands. This in turn could boost intra-EU trade through production chains and trade linkages, benefiting other EU countries.

Trade and financial contagion from the eurozone and the loss of exchange rate competitiveness will likely affect U.S. exports. Similar effects and slower U.S. growth in H2 2010 will also hit EM exports. These factors will weigh on U.S. and EM growth despite delayed fiscal and monetary tightening. This in turn will slow their imports of consumer and capital goods and commodities as well as imports of intermediate goods meant for re-export. The boost to imports from a stronger domestic currency relative to the euro will be outweighed by weak domestic demand. Weaker global outlook could lead some developed and emerging economies outside Europe to expand fiscal stimulus to sustain private demand. This could strengthen the fiscal stimulus support to global trade during 2010, though stimulus measures this time will be much smaller relative to 2008-09.

The risks mentioned above imply that inventory restocking in exporting and importing countries and its boost to global trade will be weaker than expected. At any rate, the global inventory cycle is expected to end by mid-2010. The current crisis would also force core eurozone countries and those with vulnerable fiscal outlooks to undertake fiscal austerity as soon as 2011, weighing on private demand and imports. Developed economies’ imports are expected to recover sluggishly amid slow recovery in consumption and capacity utilization. Imports of EMs with large domestic demand and any expansion of global fiscal stimulus will fail to offset weaker import demand from the eurozone and other economies.Due to these factors, global trade momentum will ease over the course of 2010 and grow at a slower pace in 2011. RGE forecasts world trade volume to grow 7.5% in 2010, with downside risks, following a contraction of 12.2% in 2009. A slowdown in trade and risks to oil and commodity prices and global commodity demand owing to financial and economic contagion from the eurozone could hit Asian and LatAm commodity exporters and keep the Baltic Dry Index volatile during 2010. As these risks delay central bank exit strategies, however, global liquidity could support commodity prices and global trade in bulk goods. Infrastructure spending under fiscal stimulus, EM commodity demand, strong Chinese energy imports, and Chinese commodity import volumes, despite growing slower than in 2009, will also support bulk trade.

Inventory restocking, strong commodity demand, and intra-EM trade have revived shipping demand, especially for bulk ships, putting idle ships into use and raising waiting times at ports. But given risks to trade recovery and excess albeit easing shipping capacity, shipping rates will grow sluggishly in 2010, failing to match their pre-recession highs in the near term.

Despite easing from their 2008 highs, the cost of trade credit and insurance will remain high in 2010 as banks are unlikely to increase lending or ease lending standards significantly.Renewed market volatility, higher interest spreads and contagion risks from EU banks could increase trade finance costs and credit risk among exporters and imports. A sharp slowdown in trade would also ease demand for trade credit.

Given high unemployment, volatile exchange rates, the uncertain export and economic outlook, U.S. mid-term elections and EU political cues, global trade protectionism and the gridlock over the multilateral Doha trade talks will continue into 2011. Governments will not hesitate to extend support once again to national champions and/or expand the scale and duration of trade-protecting fiscal stimulus measures if economic and financial conditions deteriorate. China will remain the top target of protectionism, especially as it delays currency appreciation. Going forward, weak economic recoveries and lower import demand in the U.S. and EU will make multilateral trade negotiations even more challenging. This will encourage governments to continue to pursue bilateral trade agreements, especially with EMs.

Global trade growth is unlikely to reach its pre-recession highs in the short term with exports of several trade-dependent economies, particularly EMs, growing at a slower pace. Imports by EMs with strong domestic demand, rising industrialization and commodity exports will be insufficient to offset weaker import demand in the U.S. and EU which face consumer deleveraging, fiscal austerity and slow recoveries in labor markets and household wealth. Efforts by policymakers to lead an export-led economic recovery by indulging in competitive devaluations and diversifying exports to EMs and surplus countries might be challenging in the near term and could exacerbate trade protectionism. In the medium-term, however, structural reforms in EMs and surplus countries to increase domestic demand will boost intra-EM trade and global trade flows, changing their direction and composition.


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