For the first time since 2008, the world trade contracted in the first half of 2015 (down 3% on an annualised basis). Such a development is no mere detail because it has only happened twice in the past 25 years: in 2001, after the dot-com collapse, and in 2008-09, during the great financial crisis.
Despite the structural reasons that may account for the slowdown in world trade (a pause in the globalisation process or the relocation of some portions of industrial output1), there is obviously a cyclical dimension to the decline observed in the first half of 2015. In fact, import trend reversals are typically one step ahead of turning points in domestic demand2. A breakdown of the trend by geographical region is full of lessons to be learned and endorses the view that the mature economies are decoupling from the emerging economies.
Asia and the Middle East appear to be the cause of the contraction in world trade...
Imports by Asian countries are clearly the most affected (down 10% on an annualised basis in the first half of the year), a contraction nearly as dramatic as that seen in 1997-98. On the whole, the decrease in the volume of imports by emerging countries is even sharper (down 10% on an annualised basis in the first half of 2015 compared to a 6% contraction in the second half of 1998). At that time, world trade had admittedly slowed sharply but did not really contract. The downturn seen in the first half of 2015 is due to the fact that imports are slowing in several regions at the same time (see table).
The economic slowdown in the emerging market economies was in all probability far more dramatic at the beginning of the year than official statistics suggested3. In commodity-dependent economies (such as the Middle East), the contraction in imports is due to the plunge in oil prices. In countries with close ties to China (Taiwan, Hong Kong, etc.), falling investment in China is undoubtedly playing a major role. In light of the financial upheaval that has occurred since August and the weakening of growth in several economies, it appears likely that the contraction in world trade will continue into the second half of 2015 and perhaps even into 2016 (not only in Asia and in the Middle East, but in some Latin American countries as well).
...but they are not bringing the advanced countries along in their wake
At this point, it is somewhat of a relief to note that trade is contracting only in the emerging countries. In the advanced countries, imports actually continued to grow in the first half of the year. This contrasts with earlier episodes when world trade contracted due to domestic demand in advanced countries (in 2001 and again in 2008-2009). Today, most surveys (either corporate or households) tend to show that the domestic economic cycle is continuing in the advanced economies, fuelled primarily by consumption.
Interestingly, the slowdown in exports is, on balance, far more severe in the emerging countries than in the advanced countries, which may be attributable to their trade integration situation on the one hand - with the advanced economies continuing to trade primarily with each other (see graph below) -and, on the other, by the fact that the organisation of production chains (particularly in Asia) relies on the trade of products among emerging markets.
Conclusion: no global recession in the offing
The contraction in world trade is obviously going to negatively impact global GDP growth as well as the business performance and profits of many companies which export their goods to the advanced countries. However, trade multipliers have fallen due to the decline in the income elasticities of foreign trade4. All this means that the exports of the advanced countries have become less sensitive to global demand than in the past. The trade shock transmission mechanism has therefore been weakened. In 2015 and 2016, the negative contribution from trade will presumably keep world growth from significantly accelerating. However, insofar as trade has ceased to play a leading role in recent years, the effects on world growth are expected to be offset by household consumption in the advanced countries, where purchasing power is improving due to falling commodity prices. This is probably what is being indicated by the decoupling of imports by advanced countries from those of emerging countries that we are currently seeing.
1 A number of factors have been put forward to explain the slowdown in world trade since the great financial crisis. We summarised the key causes in the previous issue of our Cross Asset Investment Strategy, No. 9.
2 The reality is that turning points in imports and in domestic demand occur at the same time. But customs statistics (from which we get monthly import data) are a step ahead of national accounts.
3 On this score, we are specifically thinking of the Chinese economy, whose GDP statistics are certainly overstating economic activity.
4 Going forward, world trade will trend at a rate much more in line with global GDP than in the past. In the 25 years prior to the great financial crisis, world trade grew twice as fast as global GDP. This implicitly means that the income elasticities of foreign trade have decreased.
For the first time since 2008, the world trade contracted in the first half of 2015
The trade is contracting only in the emerging countries
The exports of the advanced countries have become less sensitive to global demand than in the past
In China, the slowdown in industrial activity, which began several years ago, has accelerated during the first half of the year. At the same time, we noticed, for the first time since 2008, a contraction in global trade in the first half of the year. The combined effects of these two developments added to fears about a shock to the global economy. So, what conclusions should we draw from this?
Head of Macroeconomic Research
The situation has changed a lot since late 2015 and early 2016, when the first contraction in global trade volumes since the Great Recession raised many fears about the economic health of the emerging countries and, by extension, the outlook for the recoveries in the developed countries as well.
CFA, Strategy and Economic Research at Amundi
Global Head of Research