Weekly: What will cause global trade to bottom?

Global trade has slowed sharply lately, hurting growth. What could cause the trade narrative to reverse? We highlight five factors:
Taimur Baig, Nathan Chow01 Mar 2019
  • (i) impact of China stimulus on commodity demand
  • (ii) easing of China-US trade tensions
  • (iii) a modest rebound in oil prices
  • (iv) revival in tech demand around 5G rollout and new cell phone models
  • (v) bottoming of the global auto cycle, helped partly by consumer incentives in China
Photo credit: AFP Photo

Is trade bottoming?

January trade figures have been uniformly disappointing, notwithstanding the data being clouded by Lunar New Year holidays. Considering that 2018 had begun with nearly 20%yoy exports growth for Asia, the base effect is daunting to begin with it; and on top of that there are multiple sources of drag—China slowdown, trade wars, and a decidedly soft patch in global electronics demand. Poor trade figures are therefore here to stay for a few months to come, even though the fact that US non-residential investment is showing signs of picking up could be helpful to the trade narrative, on the margin.

Below we examine five factors that could help the waning trade cycle to bottom. Even if three out of five of the following play out favourably, 2019 will turn out to be one more year of decent expansion:

China stimulus

There are many doubters of the efficacy of a policy stimulus when there is so much debt overhang, but China has some formidable firepower to lifts its own, and by extension, global demand. Corporate tax reform, rebates for white goods purchase, liquidity easing measures to facilitate debt servicing and restructuring, reform measures to boost investment, and targeted boost in infrastructure spending are all on the cards. We believe that a large part of the recent stock market rally is built around these likely measures. We expect policy stimulus to prop up growth to around 6% in 2019.

China’s demand revival (or at least stabilisation) will have a salutary impact on the demand for commodities and a range of goods and services. Note that China is the world’s largest market for consumer goods, with retail sales slated to cross USD5trln this year. Whether it is autos or luxury goods, even a mild turnaround in China’s demand will be a considerable boost to sales worldwide. Along with consumer demand, if business friendly measures and infrastructure spending pick up, commodities will benefit as well.

Easing of China-US trade tensions

We don’t expect any magic bullet out of ongoing trade talks between China and the US, but with the markets pricing in considerable doom and gloom, and multinational companies decidedly uncertain and on the side-line, we wonder if the worst news has already been priced in. Even if tech wars continue, cessation of tariffs in some areas would help both trade and sentiments. A brewing and complicating factor is the incipient tension between the US and EU on autos, but our view is that the potential upside from China-US negotiations is greater than the potential downside from the EU-US tussle.

Rebound in oil

Since the beginning of this year, oil is up about 25%, reversing some of the sharp declines that took place in 4Q. We see the USD50-60/barrel range as a sweet spot, sufficient to support the exports and public finances of oil exporting economies, but not so high to undermine to the external balance or inflation outlook of oil importing economies. As long the prices remain in a 10%± range-around the USD55/barrel mark, an orderly global movement of commodities and a fairly-constructive supply-demand dynamic can be expected. We saw global freight rates fall sharply in January, but there have been signs of those rates bottoming out in the past month or so. A turnaround in the value of an index like the Baltic Dry Freight will a positive marker for us.

Revival In electronics demand

Both the mobile phone and semiconductor cycles are going through a soft patch, as seen in the published earnings and forward guidance provided by tech companies. The world is however not about to run out of innovation. Roll-out of 5G network and devices to take advantage of that, and new range of mobile phones from the market leaders in South Korea and China, may well boost tech demand modestly in the second half of the year, in our view.

Bottoming of the global auto cycle

Car sales have been weak worldwide, but we believe that the worst numbers could be behind us. A still-strong labour market and strong wage growth in the US, likely auto-purchase incentive in China, and oil prices in a benign range are three factors that could help global auto demand to bottom this year, in our view.

We are therefore not inclined to see the ongoing slowdown in global trade as a harbinger for recessionary tendencies around the horizon. Global growth may not be as strong as last year, but we are not about to head into a sharply slower patch either.

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Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Nathan Chow

Strategist - China & Hong Kong

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