ECB: Weak trade is the ‘new normal’

Trade is likely to remain weak in the coming years, according to a report by the ECB.

While global trade expanded, on average, roughly twice as fast as global output prior to the financial crisis, the ratio of imports to world GDP has largely stagnated over the last five years and will probably remain at current levels, the ECB wrote in an economic bulletin published yesterday.

The increasing importance of emerging economies, whose growth is typically less trade intensive, as well as diminishing structural factors have lowered trade ‘elasticity’ on a global and national level, according to the report.

“Looking ahead, the structural factors seem unlikely to reverse over the medium term,” the ECB said in the report.

“The gradual shift of activity towards emerging market economies is widely anticipated to persist. Moreover, the structural developments that boosted trade in the past — falling transportation costs, trade liberalisation, expanding global value chains and financial deepening — are not expected to support trade to the same extent over the medium term.”

For the world excluding the eurozone, trade ‘elasticity’ fell from 1.8 before the crisis in 1995-2007 to 0.9 in 2012-2015. Some of that weakness, particularly last year, was driven by adverse shocks in countries like Russia and Brazil, according to the report.

The ECB expects global trade growth to gradually increase to levels consistent with global GDP, bringing the global trade income elasticity, excluding the euro area, back to the “new normal” of a value around parity.

Volatility in emerging markets hovered near the highest level since June yesterday as traders awaited verdicts on monetary policy from the Federal Reserve and the Bank of Japan.

Equity benchmarks in the Philippines and Qatar gained at least 1%, while measures in Russia, Turkey, and India retreated.

South Africa’s rand extended its longest winning streak since June, while the rouble fell the most among emerging-market peers as Brent crude sold for less than $46 a barrel. Hungarian bonds rallied for a third day as investors awaited details of the central bank’s easing measures.

Investors who ploughed money into emerging-market exchange-traded bond and stock funds over the course of the past 16 weeks are waiting to see what the US and Japanese policymakers will decide on today to determine the sustainability of the rally.

Shifting sentiment around the Fed and Bank of Japan “is the driver of volatility right now,” said Tony Hann, the head of equities at Blackfriars Asset Management in London.


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