28/10/17: Trade vs Growth or Trade & Growth?

Much has been written down recently about the dramatic slowdown in growth in global trade flows. For example, after rebounding post-Global Financial Crisis (global trade volumes fell 10.46% in 2009) in 2010-2011 (rising 12.52% and 7.1% respectively), trade volumes growth slowed to below 4% per annum in 2012-2016, with 2017 now projected to be the first year of above 4% growth in trade (4.16%).

This has prompted many analysts and academics to define the current recovery as being, effectively, trade-less growth (see, for example https://www.bis.org/review/r161125c.pdf).

This is plainly false. In fact, growth in global trade volumes has outpaced growth in real GDP (based on market exchange rates) in every year since 2010, except for 2016. As the chart below clearly shows, the difference between the rate of trade volumes growth and the rate of real GDP growth remained positive in average terms:

Instead, what really happened to the two series that both real GDP growth and trade volumes growth have fallen significantly since 2011. Average growth in trade over 1980-2017 period stood 2.31 percentage points above growth in real GDP. The 2010-2017 period average gap between the two is 1.78 percentage points, the second lowest decade average after 1.48 percentage points gap recorded in the 1980s. However, these comparatives are somewhat distorted by influential outliers - years when post-recessions recoveries triggered significantly higher spikes in growth in both series, and years when trade recessions were substantially sharper than GDP growth slowdowns. Omitting these periods from decades averages, as the chart above illustrates, makes the current recovery (2010-2017 period) look much much worse than any previous decade on the record (green dashed lines).

Still, the above presents no evidence that trade weaknesses contrasted GDP growth trends. And there is no such evidence when we look at decades-based correlations between trade growth rates and GDP growth rates:

In fact, correlation between trade growth and GDP growth is currently (2010-2017 period) running at an extremely high levels of 96%, compared to historical correlation (1980-2017) of 87% and compared to pre-2010 average (1980-2009) of 88%.

So what has been happening, thus?

As the chart above clearly shows, there are significant differences in trends between the two series. Using indexing approach, setting 1979 = 100, we can compute index of real GDP activity and trade volumes activity based on annual rates of growth. The two series exhibit a diverging pattern, with divergence starting around the end of the 1980s, accelerating rapidly during 1993-2008 period and then de-accelerating since the onset of the post-GFC recovery. Notably, however, this de-acceleration simply slowed the expansion of the gap between the two series, and it did not reverse it or close it.

Currently, global GDP growth is just above the long-term trend. But global trade growth has been running below its historical trade since 2014. Back in 2004-2008 period, rate of growth in global trade vastly exceeded its trend. Why? Because 2004-2008 period was the period of rapidly inflating real assets bubbles around the globe - the period of ample credit and ample demand for investment goods and raw materials. Similar logic applies to 1994-2000 period of  In other words, the glorious days of global trade expansion, the period of accelerated growth in trade.

In other words, past periods of exploding trade volumes growth are unlikely to reflect sustainable trends in the real economy. These were the periods of substantial misalignment between trade and growth much more than the current period of slower trade growth suggests. In other words, something is happening to both trade and growth, and that, most likely, is what we call a structural slowdown or a secular stagnation.

24/2/2017: Baltic Dry Index is Still in a Disaster Territory

All of the discussions about the Baltic Dry Index - a proxy for global trade flows - in recent weeks was centred on the alleged recovery in the index valuations from the historical lows of 1Q 2016. Much of this recovery was predicated on the cost of fuel that went to inflate the cost of shipping, rather than the genuine uptick in global trade.

In fact, as the most recent data suggests, uptick in global trade volumes is nowhere to be seen:

Source: https://www.fxstreet.com/analysis/global-trade-disaster-nearly-certain-201702220646

But here is a look at the trends in the Baltic Dry Index confirming the simple fact that whatever recovery there has been, the index readings remain deeply in a trade-recession territory:

Worse, Suez Canal traffic is still trending down: http://www.hellenicshippingnews.com/suez-canal-revenues-decline-in-wake-of-sluggish-global-trade/, although Panama Canal volumes are hitting new records http://www.tradewindsnews.com/andalso/1213246/panama-canal-volumes-hit-new-record (the data is not adjusted for the capacity expansion since June 2016). Even with that expansion, Trans-pacific trade is up only 4.3% y/y in 2016, an improvement on 3.7% growth in 2015, but much worse than 5.9% growth in 2014 (see http://www.hellenicshippingnews.com/volume-recovery-in-far-east-europe-and-transpacific-trade/).

Overall, even the improved Baltic Dry Index current average for 2017-to-date is at around 831.6, which is below all 2009-2014 annual averages. Not exactly a sign of booming global economy.

25/5/16: Does the Global Trade Slowdown Matter?

The transition from the Global Financial Crisis, to the Great Recession and to currently fragile recovery has been marked not only by weaker structural growth across the economies and by massive outflows of funds from the emerging markets, but by a dramatic decline in world trade growth. Another stylised fact is that since the onset of the recovery, growth in global trade volumes has been also lagging behind growth in GDP terms.

This has been a puzzling phenomena, inconsistent with the previous recessions. Factually, global trade grew at or below 3 percent in 2012-15, which is below the pre-crisis average of 7 percent (over 1987-2007) and less than the growth of global GDP.

One recent paper (see full citation below) by Neagu, Mattoo and Ruta (2016) attempted to explain this transition to the new global growth environment of relatively subdued global trade growth. Here is a quick summary of their paper.

As chart above shows, there has been a major slowdown in growth in world trade volumes. Per Neagu, Mattoo and Ruta (2016), “proximate explanations of the trade slowdown link it to changes in GDP and, hence, to the fallout of the Global Financial Crisis. While weak global demand matters for trade growth as it depresses world import demand, cyclical factors are not the only determinants of the trade slowdown.”

In simple terms, trade is growing slower than GDP not only because GDP growth is slow itself, but “also because the long-run relationship between trade and GDP is changing. The elasticity of world trade to GDP was larger than 2 in the 1990s and declined throughout the 2000s.” So in simple terms, a 1% change in world GDP used to be associated with 2% change in world trade volumes. It no longer is.

“Among the leading causes of this structural change in the trade-income relationship is a shift in vertical specialization. The long-run trade elasticity increased during the 1990s, as production fragmented internationally into global value chains (GVCs), and decreased in the 2000s as this process decelerated.” In other words, logistic revolution of the 1990s is now over and the low-hanging fruit of improving cost margins on production outsourcing and enhancing delivery efficiencies has been picked, leaving little new momentum to drive growth in trade flows over each unit of increase in global income.

Per Neagu, Mattoo and Ruta (2016), “Economists disagree regarding the implications of the trade slowdown for economic growth (and welfare). Some believe that the slowing down of global trade has no real consequences for economic growth. For instance, commenting on the global trade slowdown, Paul Krugman noted that “The flattening out is neither good nor bad, it’s just what happens when a particular trend reaches its limits”. Others take the opposite view. For instance, in a speech as governor of the Central Bank of India, Raghuram Rajan concluded that “We are more dependent on the global economy than we think. That it is growing more slowly, and is more inward looking, than in the past means that we have to look to regional and domestic demand for our growth.”

According to the authors, “both views have elements of truth but neither may be completely right. On the one hand, the impact of the trade slowdown should not be overstated. Most economies are more open today than they were in the 1990s. In so far as openness per se is associated with dynamic benefits, trade will continue to foster growth. On the other hand, there is a risk of understating the implications of the trade slowdown. If the expansion of trade growth in the 1990s contributed to countries’ economic growth, one may suspect that the flattening of this trend will imply that the contribution of trade to the growth process will be lower.”

So, in summary, then: “Trade is growing more slowly not only because growth of global gross domestic product is lower, but also because trade itself has become less responsive to gross domestic product.”

Neagu, Mattoo and Ruta (2016) go on “to try to investigate the economic consequences of the recent trade slowdown.” The authors focus “…on two channels through which the changing trade-income relationship documented in the literature may affect countries’ economic performance.” These are:

1. “The demand-side Keynesian concern is that sluggish world import growth may adversely affect individual countries’ economic growth as it limits opportunities for their exports.”
2. “The supply side (Adam) Smithian concern is that slower trade may diminish the scope for productivity growth through increasing specialization and diffusion of technologies. In particular, a slower pace of GVC expansion may imply diminishing scope for productivity growth through a more efficient international division of labor and knowledge spillovers.”

So what do they find?

Firstly, “preliminary evidence is mixed”:

• “On the demand side, we find that the elasticity of exports to global demand has decreased for both high-income and developing economies in the 2000s relative to the 1990s.”
• “We also find that the sensitivity of domestic growth to export growth is higher, and has increased more over time, for developing economies compared to high-income economies.”
• Both of “these results, however, hold only when we measure exports in traditional gross terms.”
• “When we use value added exports, which are more relevant for the demand-side mechanism, the change in estimated elasticities is smaller and not statistically significant (although a qualification is that value added trade data are available for a shorter period and fewer countries).”

Secondly, the authors “…try to assess the Smithian concern by focusing on the growth implication of a slowing pace of GVC growth”:

• “…estimates indicate that increasing backward specialization has a positive impact on labor productivity growth…” 
• Quantifying “the growth in labor productivity due to the growth in backward vertical specialization”, the authors find that “while this share is not large, as productivity growth is explained by many factors beyond vertical specialization, its contribution has decreased by half in recent years, suggesting that the trade slowdown is a contributing factor of the decrease in productivity growth.”

In the above, note the change from blue lines (positive link between the degree of vertical specialization and productivity growth) to red lines (negative link).

In short, things are pretty bad: both factors - demand slowdown and trade slowdown - are cross-related and linked. Both are reinforcing each other, yielding growth slowdown across both supply side and demand side margins. And the side effect is: the two effects being correlated also at least in part captures productivity slowdown - aka, secular stagnation dimension.



Neagu, Cristina and Mattoo, Aaditya and Ruta, Michele, "Does the Global Trade Slowdown Matter?" (May 13, 2016). World Bank Policy Research Working Paper No. 7673. Available at SSRN: http://ssrn.com/abstract=2779830

2/5/16: There's Only One Position of Integrity on TTIP: Kill It

In a recent op-ed in FT, Wolfgang Münchau raised a very valid point that globalisation, free trade and markets liberalisation do produce both winners and losers. Nothing new here. But the key point is that this realisation must be timed / juxtaposed against political and social realities on the ground

Quoting from Münchau (emphasis is mine): “In the past two years, there has been a dramatic reversal of public opinion in Germany about the benefits of free global trade in general, and TTIP in particular. In 2014, almost 90 per cent of Germans were in favour of free trade, according to a YouGov poll. That has fallen to 56 per cent. The number of people who reject TTIP outright has risen from 25 per cent to 33 per cent over the same period of time.  These numbers do not suggest that the EU should become protectionist. But… [EU leaders] should be more open-minded about the political costs of this agreement. …A no to TTIP would at least remove one factor behind the surge in anti-EU or anti-globalisation attitudes.

The marginal economic benefits of the agreement are outweighed by the political consequences of its adoption.

What advocates of global market liberalisation should recognise is that both globalisation and European integration have produced losers. Both were supposed to produce a situation in which nobody should be worse off, while some might be better off.”

See the full text here: http://www.ft.com/cms/s/0/a4bfb89a088511e6a623b84d06a39ec2.html

Perhaps it is this dynamic - of the excess supply of losers and the over-concentration of winners - that is behind the dire state of global trade growth:

Wolfgang Münchau's article came in days ahead of the leaks that revealed the duplicit nature of EU and U.S. negotiating positions on TTIP (see Leaked TTIP documents cast doubt on EU-US trade deal), well before we knew that (again, emphasis is mine) "These leaked documents give us an unparalleled look at the scope of US demands to lower or circumvent EU protections for environment and public health as part of TTIP. The EU position is very bad, and the US position is terrible. ...The way is being cleared for a race to the bottom in environmental, consumer protection and public health standards."

In simple terms, TTIP is risking to further magnify the chasm between the winners in the Agreement (larger corporates on both sides of the Atlantic, plus Governments) and the losers (consumers, small firms and entrepreneurs).

The documents reveal that under the TTIP, "American firms could influence the content of EU laws at several points along the regulatory line, including through a plethora of proposed technical working groups and committees." If so, the TTIP will only increase bureaucratic costs and amplify impact of large corporates lobbying power at the expense of smaller firms and start ups.

As bad as the U.S. position, is, EU's position is even worse. Despite making lots of political noise about protecting European consumers, environmental and health standards etc, the EU negotiators have clearly adopted a two-faced-Janus position vis-a-vis different stakeholders. For example, on many points of more controversial U.S. proposals, "the EU has not yet accepted the US demands, but they are uncontested in the negotiators’ note, and no counter-proposals have been made in these areas." In other words, the EU leadership is saying one thing to the European audiences (advancing a virtuous position of a defender of consumer rights and environment) while positing no explicit objection to the U.S. proposals. In simple terms, the EU leadership appears to be outright lying and manipulating public opinion.

How do we know this?

"In January, the EU trade commissioner Cecilia Malmström said the precautionary principle, obliging regulatory caution where there is scientific doubt, was a core and non-negotiable EU principle. She said: “We will defend the precautionary approach to regulation in Europe, in TTIP and in all our other agreements.” But the principle is not mentioned in the 248 pages of TTIP negotiating texts." In plain English, Malmström is lying.

Another example: "The public document offers a robust defence of the EU’s right to regulate and create a court-like system for disputes, unlike the internal note, which does not mention them." Again, what is said for public consumption is at odds to what the EU is saying at the negotiating table.

Wolfgang Münchau pointed that "The marginal economic benefits of the agreement are outweighed by the political consequences of its adoption".  

But you can also add to his equation negative social consequences of the TTIP and adverse consequences to SMEs and entrepreneurs. By the time you do the sums, it is clear that TTIP is not an agreement about free trade, but an agreement about corporatist  system takeover of transcontinental trade and investment flows. As such, its marginal benefits are negative to begin with.

14/1/16: Two Charts to Sum Up Global Growth Environment

SocGen recently produced some interesting charts looking into 2016 trends. Two caught my eye, as both relate to long running themes covered on this blog throughout 2015.

The first one is that of a decline in global trade flows as the driver for growth. Per SocGen: "Global trade growth has been anchored below its historical average since the Great Recession, offering further evidence of tepid world economic recovery. Decreasing global demand, especially due to slowing emerging markets, weighs on the outlook for world trade."

http://uk.businessinsider.com/societe-generales-charts-of-the-global-economy-in-2016-2016-1


Another relates to the second drag on global economic progress - debt overhang. SocGen focuses on Emerging Markets’ debt, saying: "Zero interest policies in the developed world have bolstered debt issuance from EM corporates. Only a fraction of EM countries are immune to the current adverse conditions requiring a cautious approach to these markets."

Both do not offer much optimism when it comes to both cyclical (interest rates forward) and structural (capex and demand capacities) drivers for global growth. And both suggest that 2016 is unlikely to be more robust year for the world’s economy than 2015.

8/1/16: Baltic Dry Index Hits Another All-Time Low

Let's give another cheer to the repaired global economy... as Baltic Dry Index continues to plough new record lows: the index fell 6.9% in YTD terms and down 38.54% y/y to close at a new record low of 445.0 (4.17% below Wednesday close).

or on longer time scale:

But never fear - everything has been repaired.

22/12/15: Baltic Dry Index: not much of a post-Fed bounce

With the optimism of Christmas week forecast (traditionally keen on stressing the upside to the global economic conditions), let's not forget the Baltic Dry Index:

As the chart above shows, global trade ain't doing too well in this *finally repaired* and *full employment-bound* world economy. In fact, the index has been ploughing the depths that put to shame even the abysmal December 2008 crisis lows. Not surprisingly, the post-Fed bounce was pretty much a fizzle...

Ho-ho-ho... 

24/9/15: The Ugly Faces of Trade Protectionism

Neat chart from Credit Suisse summarising the extent (and distribution) of new protectionist policies across several key economies:

Several points worth making:

• The obvious one: the U.S. leads in terms of protectionism. Which is ironic, given the U.S. championship of open trade agreements (TTIP and TPP being the most current ones) and the U.S. tendency to de-alienate the world into 'Free Trade' and 'Protectionist' groups of countries.
• BRIC come second and Europe comes third. Which is again highly ironic as BRIC rely heavily on trade-driven model for growth and Europe can't get over how (allegedly) free trade it is.
• Everywhere, save Russia and the U.S., state aid & bailouts is minor segment of trade protectionism policies.
• Export subsidies are meaningful in China and India.
• Trade defence and finance measures dominate in the U.S., India, Brazil and Europe, and are weaker in Japan and China, while virtually non-existent in Russia.

All-in - a pretty ugly picture of reality post-crisis.

4/8/15: Global Manufacturing PMI Signals Faltering Growth in July

Global Manufacturing PMI was unchanged in July compared to June at 51.0, signalling weak growth and stalled growth momentum. Overall, activity is now at "its joint-weakest reading during the past two years".

Per Markit: "Underpinning the increase in output was further growth in new order inflows. However, the pace of improvement in new business slowed as new export orders declined for the second time in the past three months. New export business decreased in China, Germany, France, the UK, Taiwan, South Korea, Greece, Turkey, Indonesia, Vietnam, Russia and Brazil, and was little-changed in the US and Malaysia."

You can read more on this in my coverage of BRIC Manufacturing PMIs here: http://trueeconomics.blogspot.ie/2015/08/4815-bric-manufacturing-pmis-july-2015.html

2/8/15: Global Trade: Welcome to the Economic ICU

An interesting, if short, note on woeful state of global trade flows from Fitch (link here).

The key point is that:

1. Subject to all the talk about the Global recovery gaining momentum; and
2. Under the conditions of unprecedented past (and ongoing) monetary policy accommodation around the world'

global trade remains severely compressed from mid-2011 forward.

Most importantly, the rot is extremely broad - across all major regions, with no base support for trade flows.

One of the drivers - EMs lack of internal demand:

However, the EMs are just one part of the picture. Per Fitch, "Since 2012, global export volumes have consistently grown by less than 5%. Performance by value has been even worse due to the fall in global trade prices, again led lower by commodities. In April 2015, global export prices were down 16% year on year."

"There are several structural explanations for the continued weakness in global trade in addition to the GFC’s cyclical effects":

• Shift toward domestic growth in China - previously thought to be a catalyst for growth in trade via stimulating demand for imports - has had an opposite effect: Chinese producers and consumers are now increasingly sourcing goods and services internally. This was not predicted by the analysts, though I have been warning that this will be a natural outcome of the continued maturing of the Chinese economy away from producing low value added goods toward producing higher value added output. Thus, reliance of Chinese economy on capital and investment goods and services imports from Advanced Economies has declined. And we are witnessing an ongoing emergence of higher value added consumer goods manufacturing in China, which will further compress imports demands by Chinese markets. More significantly, over time, this will lead to even more complex regionalisation of trade, with trade flows becoming increasingly locked within the Asia-Pacific region, leaving more and more producers in the Advanced Economies facing an uncomfortable choice: shift production to the region or witness decline in imports demand. In line with this, there will be losses of jobs in the Advanced Economies and gains of activity in Asia-Pacific. 
• Fitch points to a policy driver for global trade slowdown: "According to the World Trade Organisation, the use of trade restrictions has been rising since the crisis and trade liberalisation initiatives have slowed relative to the 1990s. Together, these developments may be contributing at the margin to the reduction in elasticity of trade with respect to GDP." Nothing new here, as well. The world is amidst continued debt deflation cycle, with debt-linked protectionism on the rise. This is not just about currency wars, but also about financial repression and structural decline in overall growth.
• Fitch notes a third driver for trade decline: "There has been a change in the relative weights of domestic demand components, with investment falling compared with consumption and government spending… As investment spending is the most pro-cyclical and import-intensive component of domestic demand, a decline in investment tends to have a larger effect on trade." Again, I wrote before extensively on investment collapse in the Advanced Economies, and the fact that the main drivers for this are not a business cycle nor the Global Financial Crisis, but rather a structural decline in long-term growth (secular stagnation). You can read on this more here: http://trueeconomics.blogspot.ie/2015/07/7615-secular-stagnation-double-threat.html.

Fitch note, while highlighting a really big theme continuing to unfold across the global economy, misses the real long-term drivers for the collapse of trade: the world is undergoing deleveraging cycle in terms of Government and private debt, reinforced by the structurally weaker growth environment on both demand and supply sides of the growth equation. The result is going to be much more painful that Fitch (and majority of analysts around) can foresee.

5/3/15: Baltic Dry Index: Slight Gain, Still in Pain

With all the 'feel good' PMI readings of late, Baltic Dry Index has improved slightly (index gained 1.08% yesterday) from the historical lows of 509.00 on February 18 to 559.00 close yesterday.

Still, year on year, the index is down from 1391.00 to 559.00

In rather miserable 2013 on this date, BDI was at 806.00 and on the same day in 2012 it was at 782.00, in 2011 around 1382.00 and so on.

It will take a hell of a lot more 'improvement' to get us back to even remotely normal trading conditions.

25/2/15: Baltic Dry Index: Another Poor Day for EUrecovery Stroy

Two weeks ago, Baltic Dry Index was at 556. Which was bad (http://trueeconomics.blogspot.ie/2015/02/11215-baltic-dry-index-another-low.html). Now, it is at 516 or below late 1980s trough. And the European economy is allegedly picking up.

H/T to @moved_average 

What can possibly go wrong with the 'EUrecovery' story?

11/2/15: Baltic Dry Index: Another low...

Readers of this blog would be familiar with the Baltic Dry Index and with its importance in flagging up trends in global trade and, especially, in European trade.

Well, today, BDI has hit a historical low...

Source: @MktOutPerform

Good luck digging up any good news in that one...

21/1/2015: Global Trade Indicators Flashing Red

Two very interesting charts reflecting upon the same macroeconomic reality: world trade is slowing down. Big time…

First, IMF revisions of the global trade growth rates forecasts for 2015 - now at their lowest in 12 months (chart courtesy of the @zerohedge):

And next, Baltic Dry Index series printing 753,000 currently, a level consistent with depths of 2009 crisis and 2012-2013 slump (chart courtesy of @Schuldensuehner) :

All in, the above highlights the powerless nature of large scale advanced economies' QE measures when it comes to reigniting global demand.

1/10/2014: That Exports-Led Recovery... in Germany

And a Scary Chart of the Day prize goes to @IanTalley who produced this gem:

That's right, Germany is now officially producing more stuff that its people can't afford than China...

But its a good thing, for it means that people in countries like Italy, Spain, Greece, Portugal, Cyprus etc who owe Germany money can buy more stuff from Germany they can't quite afford either, except for the credit supplied from Germany funded by the credit they take from Germany... Confused? Try confused.edu for some academic analysis... or just look at KfW bank latest foray into Ireland (apparently it took months of planning to get us to this absurdity http://www.independent.ie/business/irish/kfw-deal-to-fund-irish-firms-was-months-in-the-planning-29896868.html).

23/1/2014: Remember that 'upbeat' IMF Growth Outlook?..

A quick note on the IMF update to the World Economic Outlook, released earlier this week. Here are some charts showing core forecasts progressions for growth and other global economy's performance metrics, with brief comments from myself.

The core point in the below is where does one exactly find the 'good news' relating to the IMF upgrading growth conditions expectations? The answer is that, contrary to media reports, the upgrades evaporate when once compares January 2013 forecasts against January 2014 ones, although there are some improvements in comparative for October 2013 against January 2014 forecasts. Materially, however, the upgrades are minor.

First for Advanced Economies:

The above chart shows evolution of real GDP growth for 2013 from the most recent forecast (January 2013) to the latest estimate (January 2014). The notable feature of this is the deterioration in underlying economic conditions over 2013, with forecast from January 2013 overestimating expected outrun for Global Economy growth and for all major advanced economies, save Spain, Japan and the UK. In case of Spain, forecast and outrun differ in terms of shallower expected decline in real GDP now expected for Spanish economy, compared to January 2013 forecast. In the case of Japan and the UK, the difference in higher estimated growth rates compared to forecast.

Moving on to 2014 forecasts for real GDP growth:

Much has been said in the media on foot of the IMF upgrade of its forecasts for global growth for 2014. This analysis is solely based on the comparing IMF outlook published in October 2013 against the forecast published this month. However, looking at January 2013 forecast against January 2014 forecast shows that the IMF outlook for the global economy has deteriorated since a year ago, from 2014 real GDP growth forecast of 4.1% to 3.7%. The same applies to all major advanced economies, save Germany, Italy, Japan and the UK.

Another important note here is that in the case of Italy and Germany, the difference between January 2013 and January 2014 forecasts is well within the margin of error. And that for the Advanced Economies as a whole, the forecast between two dates has not moved at all.

Thus, overall, the news analysis of 'greater optimism' from the IMF with respect to growth is really unwarranted - there is very little significant change to the upside in the IMF latest outlook.

Things are a little better for 2015 outlook:

However, we only have two points for comparing these forecasts: October 2013 and January 2014, so the above analysis (12 months span between forecasts) is not really available. Nonetheless, there is a significant marking up of global growth expectations between two forecast dates (from 2.9% to 3.9%), and  small downgrade in Advanced Economies growth forecast from 2.5% to 2.3%.

In addition, only Spain and the UK received a significant (statistically) growth upgrade, with the Euro area, Germany and Italy upgrades being within the margin of error.

The matters are actually far worse for the Emerging and Developing economies. 2014 forecasts are shown below:

With exception of Sub-Saharan Africa, all other major emerging and developing economies and regions have been downgraded in January 2014 forecast compared to January 2013 forecast.

When it comes to 2015 forecasts: there are more upgrades to growth forecasts:

But none - save for Developing Asia, China and MENA - are within statistically meaningful range.

The really devastating - the thesis of 'improved IMF outlook' - evidence comes from looking at the IMF forecast for Global Growth (controlling for FX rates):

Summary of the above chart is simple and ugly:

• Lower growth estimates for 2013
• Lower growth forecast in 2014, compared to the forecast published a year ago
• Lower growth forecast in 2015

And now, recall the 'salvation by trade' argument for Europe and Ireland? The 'exports-led recovery' story? Here are IMF latest forecasts for global trade volumes growth, and for imports by the advanced economies (AE) and emerging and developing markets (EM & developing):

Summary of the above chart is also simple and ugly:

• Lower trade growth in 2014 and 2015
• Lower imports growth in Advanced Economies in 2014 and 2015
• Lower imports growth in EMs in 2014 and 2015

So basic question is: Who will be buying all the exports that are supposed to grow across all European states?.. Martians?

16/7/2013: Doing Good By Altering Trade Flows & Incentives? Not so fast...

An interesting paper on commodities prices and policy responses to these based on actual experience with food prices inflation in 2008.


CEPR DP9555, titled "Food Price Spikes, Price Insulation, and Poverty" by Kym Anderson, Maros Ivanic, and Will Martin, published this month "considers the impact on world food prices of the changes in restrictions on trade in staple foods during the 2008 world food price crisis".

Those changes ranged from reductions in import protection (allowing for more imports to flow into the countries heavily dependent on imports of food) to increases in export restraints (aimed at reducing exports of food from the countries experiencing rising domestic prices).

The changes "were meant to partially insulate domestic markets from the spike in international prices. We find that this insulation added substantially to the spike in international prices for rice, wheat, maize and oilseeds". In other words, domestic measures to ease prices by distorting international trade flows resulted in higher international prices for these foodstuffs.

"As a result, while domestic prices rose less than they would have without insulation in some developing countries, in many other countries they rose more than in the absence of such insulation." Thus, domestic measures to combat food inflation have been beggar-thy-neighbour in their effect on other markets.

The study also estimates "the combined impact of such insulating behavior on poverty in various developing countries and globally." The study found "that the actual poverty-reducing impact of insulation is much less than its apparent impact, and that its net effect was to increase global poverty in 2008 by8 million, although this increase was not significantly different from zero." Doing good, it turns out, can cause harm. Or alternatively, you might think global trade regime in food is evil, but try telling that to 8 million people impoverished by altering that regime to superficially re-direct flows of food away from established trade patterns in just one (single and short-lived) episode.

Authors point of view on policies? "Since there are domestic policy instruments such as conditional cash transfers that could now provide social protection for the poor far more efficiently and equitably than variations in border restrictions, we suggest it is time to seek a multilateral agreement to desist from changing restrictions on trade when international food prices spike." No knee-jerk reactions, please...

15/4/2013: Advanced economies exports: converging in growth trends?

Quite an interesting new trend that emerged since the late 2000s and is reaching well into 2012-2013 so far is the trend of convergence in the rates of growth in exports of goods and services between euro area, the US and Japan.

Here are few charts:

 Note, the above correlations convergence is also confirmed on a 20 year rolling basis.

One thing is pretty clear from the above: while prior to 2004-2005 the US exports dynamics remained relatively weak compared to those of the euro area, since 2005, the picture has changed dramatically, with the US exports dynamics falling pretty much in line with those of the euro area.

Here are some interesting facts:

• On a cumulated basis, from 1981-2012, volume of exports has expanded from index reading of 100 in 1981 to 406 in 2012 for Japan, 352 for the UK, 505 for the US, 812 for the Advanced Economies and 715 in the euro area, highlighting the fact that the euro area overall cumulatively outperformed all other economies in the comparison group.
• Similarly, on cumulated basis, from 2000 (index=100) through 2012, volume of exports index rose to 156 in the case of Japan, 137 in the case of the UK, 156 in the case of the US, 227 in the case of the Advanced Economies and 237 in the case of the euro area, once again confirming euro area outperformance over the period.
• In contrast, on cumulated basis, from 2004 (index=100) through 2012, volume of exports index rose to 124.5 in the case of Japan, 122.1 in the case of the UK, 151.6 in the case of the US, 166.4 in the case of the Advanced Economies and 154.8 in the case of the euro area, showing closing gap in euro area outperformance compared to the US over the period.

The drivers for these changes are most likely a combination of factors including:

• Technological and supply chains convergence in traditional sectors;
• Increased openness in the euro area to trade;
• Changes in currency valuations with the introduction of the euro and the effects of the current crisis on currency valuations;
• Improving energy component of the total cost basis in the US, and
• Shift in exports growth toward services sectors (composition effects).

Economics 27/06/2010: G20 - real stats and real issues

As G20 leaders undertake another attempt at injecting some balance into global economic order - with last meeting in Pittsburgh focused on stimulus strategies, while the current one in Toronto focusing on austerity - it is worth taking a look at the stakes.

Bank of Canada estimates that disorderly (or uncoordinated) exit from global stimulus phase of the recession can lead to a loss of up to USD7 trillion worth of output, primarily concentrated in the advanced economies.

However, the story is more complex than the simple issue of whether G20 nations should opt for a fiscal solvency or for a continued monetary and fiscal priming of the pump. Here are the key stats on the leading global economic blocks, revealing the structural imbalances that suggest the real problem faced by the advanced economies is the debt-driven nature of their fiscal and private sector financing.
First chart above shows Current Accounts for the main blocks, including the G20. Two things are self-evident from the chart. Firstly, the crises had a crippling effect on the overall trade flows from the emerging economies to the advanced economies, though this came about mostly at the expense of countries outside Asia Pacific. Second, crisis notwithstanding, IMF forecasts (data is from IMF April 2010 update to WEO database) the trend remains for unsustainable trade deficits for the Advanced Economies. European (read: German) surpluses of the last two decades are going to be wiped out in the post-crisis scenario, but it is clear that the US, as well as other advanced economies, will have to face a much more severe adjustment toward more balanced current account policies in years to come.

These adjustments will have to involve government finances:
Chart above shows government deficits, highlighting the gargantuan size of the fiscal measures deployed by the US and European countries, as well as a massive stimuli used in some 'Tiger' economies and China, over the latest crisis. This puts into perspective the size of the austerity effort that has to be undertaken to bring fiscal policies back to their more sustainable path. You can also see the relative distribution of these adjustments - the gap between the red line and the blue line. This gap is accounted for, primarily, by the UK, Japan and US and is much smaller than the overall Euro area contribution to G7 deficits.

But there is more to the deficits picture than what is shown above. Expressed in terms of percentages of GDP, the figure above obscures the true extent of the problem. So let's look at it in absolute dollar terms:
Now you can clearly see the mountain of debt (deficit financing) deployed in the crisis. Someone, someday will have to pay for this. It will be you, me, our children and grandchildren. Can anyone imagine that things will get back to pre-crisis 'normal' any time soon with this level of deficit overhang on the side of Governments alone?

What is even more disturbing in the picture is the position of Advanced Economies in the period between the two recessions. It is absolutely clear that Advanced Economies have lived beyond their fiscal means, even at the times of plenty, running up massive deficits in the years of the boom.

This puts to the test our leaders (EU and US) claims that the banking system reckless lending was a problem. The banks were not shoving cash at the Clinton-Bush-Obama administrations, or at European Governments. Instead, just as the banks were hosing their domestic economies down with cheap cash, courtesy of low interest rates, Western governments were hosing down their friends and cronies with deficit financing. The two crises might have been inter-related, but both fiscal profligacy and banks reckless risk-taking are to be blamed for our current woes.

Irony has it, neither the banks, nor the political profligates have paid the price for this recklessness.
Hence, the dire state of the governments' structural balances. As chart above shows, in the entire period of 20 years there was not a single year in which advanced economies (G7 or G20 or the Euro zone) have managed to post a structural surplus. Living beyond ones means is the real modus operandi for the advanced economies' sovereigns. Expressed in pure dollar terms:

Now, on to the levels of economic activity:
As I remarked on a number of occasions before, the whole idea of the Advanced Economies decoupling from the world is really a problem for the Euro area first and foremost. want to see this a bit more clearly?
Look at G7 plotted above against the Euro area and ask yourself the following question. G7 includes Japan - a country that is shrinking in its overall importance in the global economy. This contributes significantly to the widening gap between the world income and G7 income. But the region in real trouble is the Euro zone. Again, this puts Euro area problems into perspective:

• Anemic growth
• Poor relative performance in terms of absolute levels of activity

In short - decay? or put more mildly - Japanese-styled obsolescence? Whatever you might call it, the likelihood of the Euro area being able to cover its debts and reduce its deficits is low. Much lower than that for the US and the rest of G7 (ex-Japan).

Some revealing stats on savings and investment:
Clearly, chart above shows the opening of the gap between the need for demographically-driven savings growth in the advanced economies, where ageing population is desperately trying to secure some sort of living for the future, and the lack of real savings achieved. It also shows the downward convergence trend in rapidly developing economies, where younger population is finally starting to demand better standard of living in exchange for years of breaking their backs in exports-focused factories.

Yet, as savings rose during the peak in advanced economies (pre-crisis), investment was much less robust and it even declined in rapidly developing economies:
Why? Because of two things: much of domestic savings in Advanced Economies, especially in Europe, was nothing more than the Government revenue uplift during the boom. In other words, instead of European citizens keeping their cash to finance future pensions, Governments were able to increase expenditure out of booming tax revenues and borrowing against the booming savings rates. Ditto in the USofA (although to a smaller extent). In the mean time, Asia Pacific Tigers started to finance increasingly larger proportion of fiscal imbalances in Advanced Economies, driving down their domestic investment pools and shifting their domestic savings into foreign assets. Which, of course, is an exact replica of the Japanese global investment shopping spree of the 1980s - and we know where that has led Japan in the end...

So the scary chart for the last:
The big question for G20 this time around will be not the stated in official press conferences and statements - but will remain unspoken, although evident to all involved: Given that over the last 20 years, advanced economies financed their purchases of exports from the rapidly developing countries by issuing debt monetized through savings of the developing countries, what can be done about the current twin threat of excessive debt burdens in advanced economies and the shrinking savings in emerging economies?

This is a far bigger question that the USD7 trillion one posited by the Bank of Canada. It is a question that will either see some drastic changes in the ways world economy develops into the next 20 years, or the permanent decline of the advanced economies into Japan-styled economic and geo-political obsolescence.

Economics 12/04/2010: The next incoming train has left its first station

My current article on the longer term prospects for global economy, published in the current issue of Business & Finance magazine. This is an unedited version.

Forget the circus of the Euro zone Government’s bickering about Greece’s bailout package and the escapist idea of setting up the EU-own EMF. The real crisis in the Euroland is now quietly unfolding behind he scenes.

Finally, after nearly 15 years of denial, courtesy of the severe pain inflicted by the bonds markets, Brussels and the core member states are forced to face the music of their own making. The current crisis affecting Euro area economy is, in the end, the outcome of a severely unbalanced economic development model that rests on the assumption that exports-led economic expansions in some countries can be financed through a continued massive build up in financial liabilities by their importing partners.

Put more simply, the problem for the world going forward is that in order to sustain this economic Ponzi game, net importers must continue to finance their purchases of goods and services from net exporters by issuing new debt. The debt that eventually settles in the accounts of the net exporters.

One does not have to be versed in the fine arts of macroeconomics to see that something is wrong with this picture. And one does not have to be a forecasting genius to understand that after some 40 years of rising debts on the balance sheet of importing nations, the game is finally up. I wrote for years about the sick nature of the EU economy - aggregate and individual countries alike.

Last week, Lombard Street Research's Charles Dumas offered yet another clear x-ray of of the problem.


Source: Lombard Street Research, March 2010

As Dumas' chart shows, core Euro area economies are sick. More importantly, this sickness is structural. With exception of the bubble-driven catch-up kids, like Spain, Ireland and Greece, the Euro area has managed to miss the growth boat since the beginning of the last expansion cycle.

The three global leaders in exports-led growth: Germany, Japan and Italy have been stuck in a quagmire of excessive savings and static growth. Forget about jobs creation – were these economies populations expanding, not shrinking, the last 10 years would have seen the overall wealth of these nations sinking in per capita terms. Only the Malthusian dream of childless households can allow these export engines of the world to stay afloat. And even then, the demographic decline will have to be sustained through disposal of accumulated national assets. So much for the great hope of the exports-led growth pulling us out of a recession. It couldn’t even get us through the last expansion!

Over the last decade, the Sick Man of Europe, Italy has managed to post no growth at all, crushed, as Dumas’ put it, by the weight of the overvalued and mismanaged common currency. The Sick Man of the World, Japan has managed to expand by less than 0.8% annually despite running up massive trade surpluses. Germany’s ‘pathetic advance over eight years’ adds up to a sickly 3½% in total, or just over 0.3% a year. France, and the UK, have managed roughly 0.98% annualized growth over the same time. Comparing this to the US at 1.27% puts the exports-led growth fallacy into a clear perspective.

I wrote in these pages before that the real global divergence over the last 10 years has been driven not by the emerging economies decoupling from the US, but by Europe and Japan decoupling from the rest of the world. The chart above shows this, as the gap between European 'social' economies wealth and income and the US is still growing. But the chart also shows that Europe is having, once again, a much more pronounced recession than the US.

Europe's failure to keep up with the US during the last cycle is made even more spectacular by the political realities of the block. Unlike any other developed democracy in the world, EU has manged to produce numerous centralized plans for growth. Since the late 1990s, aping Nikita Khruschev's 'We will bury you!' address to the US, Brussels has managed to publish weighty tomes of lofty programmes - all explicitly aimed at overtaking the US in economic performance.

These invariably promised some new 'alternative' ways to growth nirvana. The Lisbon Agenda hodge-podge of “exporting out of the long stagnation” ideas was followed by the Social Economy theory that pushed the view that somehow, if Europeans ‘invest’ money they did not have on things that make life nicer and more pleasant for their ageing populations growth will happen. Brussels folks forgot to notice that ageing population doesn’t want more work, it wants more ‘free’ stuff like healthcare, public transport, social benefits, clean streets, museums and theatres. All the nice things that actually work only when the real economy is working to pay for them.

As if driven by the idea that economic development can be totally divorced from real businesses, investors and entrepreneurs, the wise men of Europe replaced the unworkable idea of Social Economy with an artificial construct labelled ‘Knowledge Economy’. This promised an exports-led growth fuelled by sales of goods and services in which we, the Europeans, are supposedly still competitive compared to our younger counterparts elsewhere around the world. No one in Brussels has bothered to check: are we really that good at knowledge to compete globally? We simply assumed that Asians, Americans, Latin Americans and the rest of the world are inferior to us in generating, commercializing, and monetizing knowledge. Exactly where we got this idea, remains unclear to me and to the majority of economists around the world.

The latest instalment in this mad carousel of economic programmes is this year's Agenda 2020 – a mash of all three previous strategies that failed individually and are now being served as an economically noxious cocktail of policy confusion, apathy and sloganeering.

But numbers do not lie. The real source of Euro area's crisis is a deeply rooted structural collapse of growth in real human capital and Total Factor productivities. And this collapse was triggered by decades of high taxation of productive economy to pay for various follies that have left European growth engines nearly completely dependent on exports. No amount of waterboarding of the real economy with cheap ECB cash, state bailouts and public deficits financing will get us out of this corner.

The real problem, of course, is bigger than the Eurozone itself. Exports-led economies can sustain long-run expansions only on the back of a borrowing boom in their trading partners. It is that simple, folks. Every time a Mercedes leaves Germany, somewhere else around the world, someone who intends to buy it will either have to draw down their savings or get a loan against future savings. Up until now, the two were inexorably linked through the global debt markets: as American consumers took out loans to buy German-made goods, Chinese savers bought US debt to gain security of their savings.

This debt-for-imports game is now on the verge of collapse. Not because the credit crunch dried out the supply of debt, but because the global debt mountain has now reached unsustainably high levels. The demand for more debt is no longer holding up. Global economic imbalances remain at unsustainable levels even through this crisis and even with the aggressive deleveraging in the banking systems outside the EU.

Take a look at the global debt situation as highlighted by the latest data on global debt levels. The first chart below shows the ratio of net importing countries’ gross external debt liabilities (combining all debts accumulated in public and private sectors, including financial institutions and monetary authorities) to that of their net exporting counterparts. The sample covers 20 largest importers and the same number of largest exporters.

Source: IMF/BIS/World Bank joint data base and author own calculations

As this figure illustrates, since mid-point of the last bubble at the end of 2005, the total external debt burden carried by the world’s importing countries has remained remarkably stable. In fact, as of Q3 2009, this ratio is just 0.3 percentage points below where it stood in the end of 2005. Compared to the peak of the bubble, the entire process of global deleveraging has cut the relative debt burden of the importing states by just 9.8%.

To put this number into perspective, while assets base of the world’s leading economies has fallen by approximately 35% during the crisis, their liabilities side has declined by less than 10%. If 2007 marked the moment when the world finally caved in under the weight of unsustainable debt piled on during the last credit boom, then at the end of 2009 the global economy looked only sicker in terms of long-run sustainability.

The picture is more mixed for the world’s most indebted economies.
Plotting the same ratio for the US and UK clearly shows that Obamanomics is not working – the US economy, despite massive writedowns of financial assets and spectacular bankruptcies of the last two years remains leveraged to the breaking point. The UK is fairing only marginally better.

Of course, Ireland is in the league of its own, as the country has managed to actually increase its overall share of global financial debt during this crisis courtesy of an out-of-control public expenditure and the lack of private sector deleveraging. Take an alternative look at the same data. Ireland’s gross external debt (liabilities) stood at a whooping USD 2.397 trillion in Q3 2009, up 10.8% on Q3 2007. Of these, roughly 45% accrue to the domestic economy (ex-IFSC), implying that Irish debt mountain stands at around USD 1.1 trillion or more than 6 times the amount of our annual national income.

Chart below shows gross external debt of a number of countries as a share of the world’s total debt mountain.
Source: IMF/BIS/World Bank joint data base and author own calculations

And this brings us to the singularly most unfavourable forecast this column has ever made in its 7 years-long history. Far from showing the signs of abating, the global crisis is now appearing to be at or near a new acceleration point. Given the long-running and deepening imbalances between growth-less net exporting states, like Germany, Japan and Italy and the net importers, like the US, we are now facing a distinct possibility of a worldwide economic depression, triggered by massive debt build up worldwide. No amount of competitive devaluations and cost deflation will get us out of this quagmire. And neither a Social Economy, nor Knowledge Economics are of any help here.

Paraphraisng Cypher in the original Matrix: “It means fasten your seat belt, Dorothy, ‘cause Kansas of debt-financed global trade flows is going bye-bye”.