‘Sluggish’ trade remains a concern in global economy

Figures released in the week before Christmas showed that Ireland’s seasonally- adjusted merchandise trade balance rose in October to its highest level since August 2012, exports broke the €10bn level in a single month for the first time ever, and the overall trade surplus in 2015 is set to post its first absolute increase since 2010.

On the surface, the data would suggest a healthy global trading environment, but that would be far from the case.

Ireland benefits enormously from its US multinational components, and in particular the pharmaceuticals industry as regards merchandise trade.

However, other countries aren’t so lucky.

World trade growth has slowed sharply this year.

The most recent figures from the CPB Netherlands Bureau, which aggregates official national trade numbers, estimates that world trade volumes fell slightly in the year to September.

Other indicators paint a similar picture.

For example, the amount of cargo moving through the Suez Canal and the world’s ports is contracting in year-on-year terms and growth of air freight volumes has slowed dramatically.

All told, it would appear that world trade will post growth of just 1% in 2015, its weakest performance since 2009.

Does this then, suggest that the global economy is set for a serious downturn over the next year?

We don’t think so.

For starters, there has been only a very small decline in the absolute volume of trade.

Although sharp decreases in trade were a feature of economic downturns in 2001 and 2009, the sluggishness this time round has more in common with 2012 and 2013, when trade volumes grew at a slightly weaker pace than world GDP.

Secondly, the downturn has not been broad-based.

Imports to emerging economies have slumped, but those to advanced economies have grown solidly this year.

Meanwhile, global trade in services — which is not included in the timely merchandise trade figures — appears to be expanding at a healthy pace.

Indeed, this is a reminder of how major developed economies are now more reliant on the services sector than the traditional manufacturing industry, a trend that is set to become more evident in the coming years across the world.

Then there is the argument that the worst may be behind us on the global merchandise trade front.

Imports to emerging economies appear to have picked up a bit.

And for what they’re worth, survey measures of export orders have risen in most major economies over the past few months, particularly in China.

Still, the overall trade situation remains a cause of concern for many.

The Organisation for Economic Co-operation and Development trimmed its global growth forecasts in November amid a “deeply concerning” slowdown in world trade and slower growth in emerging markets.

Global trade performance has been disappointing for a number of years.

According to data from the World Bank, except for a solid post-recession rebound in 2010, when global trade rose 13% , it has been relatively subdued in recent years, averaging 3.4% annual growth rate between 2012 and 2014.

This rate is well below the pre-boom average growth of about 7% per annum.

If global trade had continued to expand in accordance with the historical trend, it would have been 20% above its actual level in 2014.

In recent years, world trade has become less sensitive to changes in global income.

At the end of the day, global trade is growing more slowly not only because world income growth is lower, but also because trade has become less responsive to income growth.

Impaired credit channels could be another important driver of trade performance, given that trade finance becomes costlier and less available during financial crises and their aftermath.

Financial institutions facing deleveraging pressures are forced to cut back on credit growth in order to boost their liquid assets.

Trade finance instruments, which are often short-term and self-liquidating in nature, tend to be among the most susceptible to credit crunches.

Exporters and importers, particularly small- and medium-sized firms, have reported facing serious funding challenges in the aftermath of the global economic/financial crisis.

Although Irish trade figures look very solid, we would be more comfortable as regards the world GDP growth numbers for next year if global trade were stronger.

However, the sluggishness of world trade growth in 2015 is not enough in our view to point to a significant slowdown in the global economy in 2016.

Alan McQuaid is the chief economist with Merrion Capital