International trade research

A perfect storm for world trade?Temporary supply problems and a decline in finaldemand in some regions push down trade

in China. In 2Q15, world imports continued to shrink, this time mainly driven by a decline in import demand in all of the major advanced economies. Japan, Asia’s second-largest economy, shows the largest decline. The fall of Japanese imports is twice as large as the decrease in US import demand. In emerging countries, import demand did not, on balance, fall further in 2Q, but within this group differences are large. China recovered, but others still show falling imports.

Temporary supply-side effects hit world trade…The negative import demand from Asia catches the eye. Nose-diving oil and commodity prices could have been favourable for private demand and hence imports in big oil-importing countries such as China. But Chinese import demand weakened instead. This partly reflects falling exports, since less production of exports leads to less demand for imported inputs (figure 1).

World trade is shrinking and is facing several headwinds. The coming months could bring further bad news if the recent turmoil in financial markets feeds through to the real economy. But once financial markets become more stable, we believe world trade should recover on the back of a recovery in global industrial production.

Table 1. Lower import demand in various regions around the world

Goods imports (% change QoQ, volumes)

14Q4 15Q1 15Q2

World 1.3 -1.6 -0.5

Advanced economies 1.2 1.7 -1.0

US 4.2 2.0 -0.9

Japan 1.1 0.8 -1.8

Eurozone 0.3 1.6 -0.6

Other advanced economies -0.9 1.6 -1.5

Emerging markets 1.4 -5.0 0.0

Asia 2.8 -7.2 0.2

China 0.9 -13.0 3.2

Central and Eastern Europe 0.8 -1.4 -0.6

Latin America 1.1 0.3 -0.1

Middle East and Africa -2.1 -4.2 0.1

Source: CPB

Widespread trade declineWorld trade is in an exceptional position. While world GDP is growing at a reasonable pace, world trade – as measured by the volume of world imports – is shrinking. The latest World Trade Monitor release from the CPB Netherlands Bureau for Economic Policy Analysis shows a 0.5% month-on-month decline in world imports for July. Looking back a bit further, world trade has shrunk for two consecutive quarters (table 1), while world GDP is growing around 2.5% on an annualised basis. Such a divergence has not happened since the CPB started measuring world trade in the early 1990s1.

Import demand began to fall in 4Q14 in the Middle East and Africa, as well as in the so-called ‘other advanced economies’. This group includes commodity exporters such as Australia and Norway, among others.

The import decline in the Middle East, Africa and other commodity-exporting countries is most probably related to the plunge in their earnings, caused by the sharp drop in commodity prices since spring last year.

In 1Q15, world imports decreased. Besides the Middle East and Africa, import demand from Asia declined steeply, especially

1 The first quarter of 2012 comes closest to the current situation. GDP grew at

an even higher rate and world trade shrank, but the trade decline was over

after one quarter.

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A perfect storm for world trade? 2

Falling Chinese exports have in part been caused by a temporary supply effect. The Chinese New Year and the following holidays were longer this year and took place in March. So the downward effect on production in 1Q – and the related negative effect on import demand – was large compared to last year. Since Chinese exports are dominated by industrial products, the export decline goes hand in hand with lower growth in China’s industrial sector.

The strong relationship between the growth of industrial production and imports can be observed on a global level as well (see figure 2). This stems from the fact that industrial goods dominate international trade.

Focusing on industry helps to explain why world trade growth is not keeping up with world GDP growth. Industrial growth in the US and in the Eurozone has been lagging GDP growth in 1H15.

In the US, temporary negative supply-side effects are partly responsible as well. Port strikes on the West Coast and bad weather in the Northeast have depressed industrial production in 1H2015 and have consequently negatively affected import demand.

In the Eurozone, industrial production growth has been weak, especially in 2Q, putting the brakes on import demand. Weak industrial production growth in the Eurozone is, among other things, related to destocking. Less demand from Asia also plays a role (see next paragraph). Together with euro depreciation, weak industrial production is the reason why the Eurozone hasn’t pushed up growth of world import demand, despite the fact that GDP growth is much higher than last year.

…as well as weakening demand from AsiaBesides Chinese and US supply effects, softer domestic demand in some regions, like Asia, may also be responsible for the slump in world trade.

Although the fall of Japanese imports is being caused partly by the yen’s weaker exchange rate, the 0.7% quarter-on-quarter drop in private consumption in 2Q is likely to have played a role as well. Private non-residential investment was also quite weak (-0.9%), Japanese national account data show.

Besides Japan, South Korea also showed weaker domestic demand, with consumption falling 0.2% in 2Q. Hong Kong, the 7th largest importer in the world, imported 3% less (in value) in 2Q compared with 1Q. This decline in imports seems related to the 4% decline in (re)exports to other Asian countries due to sluggish demand in those countries.

Analysing domestic demand in China is difficult, as no recent data is available for consumption and investments in real terms. However, nominal data suggests that aside from the fallout of import demand by enterprises (commodities and intermediate products), household demand may also have added to the decline in imports in 1H2015.

Figure 3 shows that not only imports from commodity exporters are down, but that Chinese demand for EU products fell as well during the first seven months of 2015. For example, during this period the volume of imported motor vehicles from the EU was 24% lower than the year before, data from the statistical office of Chinese customs show.

Figure 1. Chinese import demand closely related to Chinese exports (values, % change yoy, 3 month moving average)

Source: Macrobond

Figure 2. World industrial production and world imports (QoQ, % change)

Source: CPB

jan-11 jul-15jan-15jul-14jan-14jul-13jan-13jul-12jan-12jul-11-20%

-10%

0%

10%

20%

30%

40%

Export Imports World import growth World industrial growth

-12%

-8%

-4%

0%

4%

8%

2015q1

2013q3

2012q1

2010q3

2009q1

2007q3

2006q1

2004q3

2003q1

2001q3

2000q1

-8%

-6%

-4%

-2%

0%

2%

4%

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A perfect storm for world trade? 3

Figure 3. Imports by China by order of its 10 largest trade partners (% volume change yoy, Jan-Jul 2015)

Source: Chinese customs statistics

Figure 4. Chinese purchasing managers more pessimistic*

* The reading for September 2015 is based on a preliminary estimate.

Source: Markit, Purchasing Managers Index China

Outlook The Asian economy has entered troubled waters, with the recent turmoil in Chinese financial markets. We expect this to be a setback for economic growth of Asian economies in 3Q and for the growth their import volumes as well. The steep drop of the manufacturing PMI in China from 49.4 in June to 47.3 in August and a preliminary reading for September of 47, points in that direction (figure 5). The decrease in Chinese nominal imports in July and August (-8.4% and -13.5% respectively) does that as well. The spill over effect of the troubles in China to other Asian economies could hurt the import demand of these countries in 3Q as well. Looking forward, our baseline scenario is that world trade will recover. We expect Chinese budgetary and monetary stimulus to lift Chinese GDP growth in 4Q. Higher GDP growth will probably translate into higher import demand from China.

The Eurozone could also be a driver of world trade in the period to come. A higher growth rate is expected for Eurozone industry in 2H15, since inventories are currently quite low, capacity utilisation is quite high, new orders have been increasing and sentiment among purchasing managers continues to be positive. A better performance by industry would boost import demand.

In our baseline scenario for the short term, the turmoil in the financial markets is short-lived and the effects on economic growth and trade are limited. Asian economies can land softly and the US and Eurozone economies stay relatively unaffected.However, our baseline scenario is subject to risks. Market volatility remains a downward risk. Renewed turmoil in China or uncertainty about monetary policy in the US could cause new volatility and related to this, more capital flight from emerging markets.

Another risk is a prolonged currency war – one devaluation in pursuit of boosting price competitiveness could trigger another, despite the recent public statements of the G20 countries to refrain from such policies. Exchange rate volatility is bad for trade because it increases revenue uncertainty for enterprises. This risk can be reduced through hedging currency movements. But in a world of significant exchange rate fluctuations, hedging currency risk is expensive and thereby a (cost) barrier for trade.

For the longer term, we reiterate our view that growth of world trade will return to outpace growth in world GDP in the years to come. Assuming that the world economy will not enter into a serious downturn, we expect world trade to grow 20% faster than world GDP in 2016 (please see our note, The world trade comeback.)

ConclusionThe decline in world trade in the first half of 2015 stems partly from temporary supply factors in the US and China. These held back industrial production and thereby import demand for natural resources and intermediate products. Besides supply factors, the decline in world imports is caused by weakening final demand in regions such as Asia, the Middle East and Africa.If we assume that the turmoil in stock and exchange markets is short lived and the world economy doesn’t enter into a serious downturn, we expect world trade to recover gradually and outpace GDP growth by 20% in 2016.

-30

-25

-20

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RussiaBrazilMalaysiaAustraliaTaiwanJapanUSSouthKorea

ASEANEU

46

48

50

52

54

9/20155/20151/20159/20145/20141/20149/20135/20131/20139/2012

Below 50 = negative sentiment

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For more information, please contact:Raoul LeeringHead of International Trade ResearchING Economics DepartmentTel. +31 6 13 30 39 44

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