Author Archives: Charlie Harding

July – Trade Outlook

Three charts to show why the South and East China Seas matter

Japan does not officially have an army, it has a Self Defence Force. So, when it starts sending warships into the South China Seas in an attempt to keep China’s territorial claims in check, it is clear there is a problem. Its Izumo helicopter carrier’s presence is to provide the assurance to the region that it is willing to move into a more proactive military role in the interests of regional security at a time when US interest is at best only focused on North Korea, and at worst, waning. While the US nominally retains its commitment to the “Freedom of Navigation Operations” (Fonops) to provide a base for regional security, its military operations are taking a lower key and not being publicised as they were under the Obama regime. As the US appears to look away, China continues to build and protect what it deems its sovereign and economic rights. China can play a long game without using its military muscle, but the very fact that it is demonstrating its regional influence reinforces the perception that tensions in the region are dangerous.

The region matters to world trade flows and to its energy security. The importance of the South and East China Seas cannot be understated. It is not just a source of geopolitical tension, it is also a major trading route. The countries in the region’s US$ 10.7tn trade accounted for just over 54% of world trade in 2016. More than this, the countries in the South and East China seas account for just over 40% of world oil trade (Figure 1). Any risk of disruption or threat of instability should make markets and commentators alike feel nervous as a result, not just because of the spill-over effects into the global trade system but also because of the region’s strategic importance.

 

Figure 1:  Share of world oil trade for countries in the South and East China Seas area 2016
Source:  Equant Analytics 2017

The region matters to China as well. Trade with the other countries in the South China Seas account for some 51% of China’s trade (Figure 2)

Figure 2:   China’s trade with nations and Hong Kong in the South and East China Seas
Source:  Equant Analytics, 2017

Hong Kong is China’s biggest trading partner in the region at more than twice the value of trade compared with Japan, its second largest trading partner. The regional partners, Indonesia, the Philippines, Malaysia and Vietnam in particular, are important contributors to regional supply chains in electronics and machinery & components meaning that their regional fortunes are intertwined. As China has gone through its economic reform programme of the past few years, it is these regional partners who have had to adjust. But any political instability in the region threatens trade flows within the region as well as between the region and the rest of the world. This impacts China just as much as it does other countries and as a result, China will be keen to ensure that there is no escalation of tensions beyond rhetorical ones simply because it is in its own strategic interest.

China’s strategic interest is evident in the East China Seas through its relationship with North Korea. As sanctions have become more stringent, China’s share of North Korean trade has increased (Figure 3). The momentum projections suggest that this may well stabilise over the next few years but at over 85% of North Korea’s trade, China has a strong strategic leverage over Pyongyang.

Figure 3:   Percentage share of North Korea’s trade accounted for by China (1996 – 2021)
Source:  Equant Analytics, 2017

The US and China have engaged in talks since their Summit in April, not overtly about North Korea – but about trade. Why? President Trump explained this in a tweet on the 11th April: “I explained to the President of China that a trade deal with the US will be far better for them if they solve the North Korean problem!” In other words, trade is a strategic tool to gain influence over North Korea. An explicit “trade war” between the two countries was avoided because of the post Summit “100 day plan” and although the deals struck since then have been modest, they have the effect of diverting global attention away from the region.

The perception of geopolitical risk in the South and East China Seas is not new. In the South China Seas the disputes are territorial and between countries; the role of the US has been to keep the trade route that it represents open in the economic strategic interests of the world. The risks in the East China Seas and Korean Peninsular are as much about strategic influence as they are about trade.

However, a deliberate armed conflict is unlikely as the example of North Korea and the “trade deals” with China show. It is simply too important to the US and the world, in terms of energy security, in terms of trade flows, in terms of economic interests and more generally in terms of national interest and power. Increasingly, the disputes in the region are centred around strategic influence. Trade, or the threat of disruption to trade is the means by which any conflict will be fought: it is a bargaining chip. China knows this and holds increasingly more of the cards as the US looks away.

 

 

 

June – Trade Outlook

Article 50: time to take a strategic look at trade

Almost as soon as the dust settles after the UK election, the Article 50 process to negotiate the UK’s exit from the EU will start. The UK so far has relied on a conciliatory Europe led by a Germany that was genuinely saddened by the loss of its like-minded Anglo-Saxon ally and therefore more likely to drive the bloc towards compromise. The G7 and NATO summits at the end of May, and the inauguration of President Macron have changed all that. Europe is finding a new assertiveness on the global stage. This was articulated by Chancellor Merkel in her Munich speech; she argued that the US and the UK could no longer be relied upon and that Europe must find its own voice to promote its own interests. And while much of the rhetorical anger in the speech may simply be attributed to electioneering, it serves as a wake-up call to the UK. Europe will have its own strategic interests when it starts the negotiations and the UK would do well to be aware of what these are.

Trade is political and this makes it strategic – that is, something that can be used as a tool to promote national or regional interests in economic or foreign policy terms. In this, EU negotiators will be keen to protect Europe’s economic and energy security as well as increasingly focused foreign policy interests.

The EU’s top ten export and import trade flows by sector with the UK are automotives, machinery (including computers), pharmaceuticals, electrical equipment and oil and gas (Figure 1). The top fifteen trade flows by sector add optical, photographic and medical equipment, plastics and aerospace. These are not just the top trade sectors for the EU as a whole; they are also among the top sectors for Germany, France, the Netherlands, Italy, Belgium and the UK.

Given that Europe exports to the UK some 85% more than it imports from the UK, it has been assumed that the cards are stacked in the UK’s favour. However, trade “wars” are reciprocal: one side imposes tougher arrangements and the other retaliates. As these are the top sectors for the UK as well, and as Europe is the UK’s largest export destination for each of these sectors, it will be important to bear in mind that the symbiotic relationship in these sectors are because of Europe-wide supply chains. Everyone will lose without some compromise.

 

Figure 1: Top 15 trade flows by sector between EU and UK (exports and imports, 2016, US$ bn)
Source: Equant Analytics, 2017

The second thing to note is just how concentrated this trade is. The top ten flows account for 53% of Europe’s trade with the UK. Add in plastics, optical and medical equipment and aerospace (the 11th and 12th largest flows and in the top five for Germany, France and Italy) and the top flows account for over 60% of Europe’s trade with the UK (Figure 2).

Again, the dominance of exports to the UK is clear – the top four sectors are all exports to the UK and constitute over 31% of Europe’s trade with the UK. Again, however, the importance of Europe-wide supply chains is critical. The UK is a large export market for German cars and automotive components, but this is because the UK is a major location within Europe for the manufacture of German cars. While this may appear that Germany is more dependent on the UK than the other way around, the UK’s exports of cars to the US has grown at an annualized rate of 9% and to China at an annualized rate of 13% over the past five years. This is not all attributable to German manufacturers, but there is no doubt that this has had an influence.

 

Figure 2:  Share of EU trade with the UK, top fifteen sectors, 2016 (%)
Source: Equant Analytics, 2017

Finally, the EU 27’s trade is 73% correlated with the value of the euro since 1998 suggesting that it is a trade-based currency rather than a speculative one. Its trade with the UK is slightly weaker at 70% but this is still substantial. (Figure 3). The euro is the world’s second largest trade finance currency and its position and strength can therefore be seen as a function of the strength of Europe’s trade. This is a quite distinct function for the euro and explains why Germany in particular has been keen to hold the Eurozone together: the euro’s economic importance is in trade and as supply chains develop across the region, this becomes more rather than less important. Just as is the case for Europe, a stable euro for the UK ensures that prices within the supply chains into which UK businesses are woven are also stable.

 

Figure 3:  EU 27 exports to UK vs euro-usd spot price, 1998-2016
Source:  Equant Analytics, 2017

Elections distort rhetoric and there is anger in Europe about the UK’s bellicose tone which, along with Trump’s visits at the end of May provoked the response from Angela Merkel that former allies could no longer be trusted and that Europe would have to go it alone. The danger is that rhetoric becomes entrenched on both sides after the election in the UK because there is still a long way to go before the German election. This would be a negotiating mistake on the part of the UK. Europe’s and the UK’s trade is almost symbiotic because of the importance of supply chains. Policy makers on both sides would do well to remember this.

May – Trade Outlook

Just how globalised is France?

The French election campaign has raised some important questions: first, what is France’s role in the world, and second how can that role be articulated to its citizens? It is easy to campaign on the back of a view “for” or “against” globalisation. But the reality may well be more complex: to many, globalisation is a threat and it is therefore the next President’s responsibility, to explain why France would do itself great damage by extracting itself from the global, free-trade economy.

France is the fifth largest trading nation in the world with its exports contributing over US$ 600bn in 2016 to the country’s GDP. France is also the fourth most open economy in the G20 measured as the proportion of GDP accounted for by trade at 48% compared to 43% in the UK, for example. While this is not as open as Germany, at 63%, it still shows that trade matters to the French economy and French jobs. More than this, out of France’s 12 largest trade partners, 7 are in Europe (Figure 1), although trade outside of the EU, particularly with the US, China and the UAE is growing more quickly than trade with its European partners.  France’s exports to Germany were worth US$ 80.5bn in 2016 and exports to the US worth US$ 50bn but the growth with the US suggests the gap is not necessarily permanent.

Figure 1:          Projected growth in trade between France and its top partners ordered by size left to right, 2016-2020 (CAGR, %)
Source:           Equant Analytics, 2017

France’s trade with Germany and the US is dominated by aircraft and aerospace. This is France’s largest, and fastest growing, trade sector (Figure 2).

Figure 2:  Projected growth in France’s top trade sectors ordered by size left to right, 2016-2020 (CAGR, %)
Source:  Equant Analytics, 2017

France has strong automotive supply chain relationships with Poland and this is reflected in the fact that imports from Poland are set to grow at an annualised rate of over 3% in the next few years. This also helps to explain why France’s exports of cars and electronic equipment are projected to be either flat or to fall. While beverages and perfumes remain strong growth sectors, their exports are a lot lower in value terms to the French economy, at US$ 18bn for cars and electronic equipment and US$ 16bn for beverages and perfumes compared with US$ 86.4bn contributed by aircraft.

It is in the aircraft and aerospace sector where the real global nature of the French economy can be seen. Given how large this sector is, it is significant that the top trade flows in it are exports to Germany (US$ 20.3bn), imports from Germany (US$ 16.2bn) imports from the US (US$ 13.2bn) and exports to China (US$ 8.3bn). This illustrates just how global this sector is (Figure 3) and, more importantly perhaps, how strong French exports are since all bar four of its top 20 trade flows are exports.

Figure 3: Value of France’s top aircraft and aerospace trade flows by partner, 2016 (US$ bn)
Source:  Equant Analytics, 2017

Trade matters for France and for French jobs given how open the French economy is. French car and consumer electronics manufacturers have taken advantage of cheaper labour in Poland in particular and have built European supply chains, particularly with Poland, to guarantee the competitiveness of their sectors. Aerospace is a more global sector with flows across Germany, the US and China dominating the top five trade flows in this sector. France dominates sectors where globalisation is irreversible. The French election campaign has been fought on the basis of the negative aspects of globalisation through immigration and its weaker power within Europe compared to Germany because of its economic under-performance since the financial crisis. It is the task of the new administration to put globalisation on a positive footing so that the French people feel comfortable with their global as well as their national role in the world.

April – Trade Outlook

What does trade tell us about the oil price? In the first Trade Outlook of 2017, we pointed to a somewhat negative outlook for oil prices. Although analysts at the time saw prices increasing as demand recovered and production stayed at similar levels, based on our trade forecast for oil, we felt that the picture was at best neutral and maybe slightly negative. This was in line with OECD thinking but the World Bank and the EIU at the time were both suggesting that prices would rise.

The reason for the more negative outlook that we had at the time was because of the very high correlation between world trade values and the oil price (Figure 1). This correlation, of 90%, does not tell us how the oil price will move. It simply tells us that it is highly correlated with trade values, which is reasonable since oil is the world’s third largest traded sector with a value of $1.9 trillion in 2015. However, it does tell us that if trade is projected to remain static, then there is a greater likelihood that oil prices will also remain static.

 

Figure 1:  Monthly value of world trade in oil (USDm) vs oil spot price (last price monthly), Jan 2010-Jan 2017
Source:  Equant Analytics, 2017

The trajectory for oil prices since January has been downwards reflecting the flatter pattern in world trade.  Last month highlighted the difficulties of predicting oil prices. In the middle of the month, oil prices had fallen 10% in one week to their lowest level since OPEC cut production in November 2016. In the last week of the month, prices had rallied with the best week so far in 2017. A Reuters poll at the end of March suggested that analysts were not expecting oil prices to rise to $60 a barrel until 2018 at the earliest. But with the trade outlook flat for 2016 and 2017 and growing only slightly into 2017-18, the prediction of $60 a barrel in the near term would appear to be only possible were there an unexpected dose of market hubris! (Figure 2)

Figure 2            Projected growth in total world trade vs world trade in oil year on year (2016-17 and 2017-18)
Source: Equant Analytics 2017

There are two key issues. The first is whether demand is increasing relative to production. As the US increases its output of shale, there is little doubt that the US itself will be able to meet its domestic demand, taking market share from OPEC and non-OPEC aligned producers. This will keep prices flat during the course of the year if this pattern continues and, potentially at least, push prices downwards if the OPEC producers decide to go for an all-out price war when they meet in May. Falling projected global trade in oil suggests that demand will be at best weak relative to prices.

The second is the shift in the patterns of production in the market. This is evident in how trade has grown over the past five years and how it is projected to grow over the next five years (Figure 3).

Figure 3           Selected mineral fuel trade vs electrical energy growth 2010-15 and 2016-21 (CAGR %)
Source             Equant Analytics, 2017

The prospects for growth in each mineral fuel sector is more positive from the second period with 2016 as its base compared to the post-crisis period. However, only trade in petroleum wax, coke and bitumen and bitumen and shale show positive annualized growth and the most substantial projected growth is in the bitumen and shale sector. Although electrical energy’s decline in trade growth is projected to slow, it is still a very small sector compared to other mineral fuel sectors and its improvement does little to suggest that a major change is on its way.

What this suggests is that the oil sector as a whole is likely to dominate for some time to come despite environmental pressures. Demand is growing, but it appears that it will be met by current energy sources rather than new ones. The greatest improvement in trade growth over the two time periods is in bitumen and shale and this corroborates the view that US shale production, increasingly cost effective as it is, is likely to compete favourably in oil markets with crude and refined oil to meet the growth in demand, particularly in the US itself.

 

 

March – Trade Outlook

The stage looks set for the UK to trigger Article 50 as planned by the end of March 2017. This will start the process of negotiating the UK’s way out of the European Union, a process which will be at best difficult. As no-one at this stage knows precisely what the trade arrangements will be after Brexit, and as these arrangements won’t come into place for at least eighteen months, it is a good idea to take a snapshot of where we are now in trade terms  and, indeed, to look at what the future looks like if nothing changes. At the very least, this provides a reference point for that point in the future when we are, well, where we will be.

Figure 1:          Projected annualized average growth of UK trade with global regions, 2016-2020
Source:            Equant Analytics 2017

NOTE:     The projected growth between 2016 and 2020 is based on a momentum forecast only. The momentum forecast is taken from all available data for the UK between 1996 and 2016 (inclusive) to capture cyclical changes in trade and from the last ten years and the last three years to create the forward momentum. The projections are based entirely on the data series and not on assumptions about policy changes or their impact. This note applies to Figures 2 and 3

At first glance the chart shows that although UK exports to the EU 27 and the EU currency area are projected to fall, export growth to the Asia Pacific region (APTA) may be as high as 7.4% annually to 2020. This is a pattern that has been gaining some momentum for the past few years, particularly since the investment of BMW in the UK, which has boosted car exports to China for example. Export trade to the Middle East and North Africa is also projected to grow and much of this is in aerospace and engineering-related supply chains. Trade with North America seems set on a downward path – clearly Theresa May’s recent visit to the US has yet to show through in the projections!

However, two key points about this chart need to be considered before a universally positive conclusion is drawn. First, generally speaking, imports look set to grow faster than exports. Some of this may simply be due to the weakness of sterling making imports more expensive but it does suggest that even on current conditions our exports are not growing fast enough to cater for increases in imports. Imports from the Asia-Pacific region (notably China) are the notable exception but as we export just over half to the Asia Pacific region compared to what we import ($46.6bn compared to $87.5bn) this explains why growth of imports might be slower.

Second, exports to Europe, both the EU27 and the Eurozone are set to decline and the increase in export trade with Asia Pacific, even on current trends, is insufficient to make up for this loss. We project exports to the EU27 to be worth $197.6bn by 2020 while exports to the Asia-Pacific region to be worth around $57.6bn, or just under 30% of the value of European exports by 2020.

The picture of UK trade by sector shows just how integrated into global supply chains our businesses are. For example, the top ten sectors (shown in Figure 2 from left to right by size), also show that generally imports are set to grow more quickly than exports. This may not in itself be a bad thing, because where imports are growing in components, for example, the UK is able to add value through its exports of cars. Certainly for pharmaceuticals the projected annual growth to 2020 of 2.8% is substantially higher than the annualized growth between 2010 and 2015 of 1.2%.

 

Figure 2:          Projected annualized growth for the UK’s top trade sectors, 2016-20 (%)
Source:            Equant Analytics, 2017

However, UK export growth is fragile, even on the basis of current conditions. Projected export growth to 2020 for computing is close to zero, while export growth for automotives is one third of the rate it was in the 2010-2015 period of 6.0%. Exports in electronics, organic chemicals and oil and gas look likely to decline. The obvious exceptions are gold and precious metals and works of art where exports will grow more quickly than imports.

Figure 3:          Projected annualized growth, 2016-2020, for key UK services (%)
Source:            Equant Analytics 2017

The UK runs a trade surplus in services and exports overall look set to grow faster than imports over the next five years. However, the picture is mixed. Travel, transport, intellectual property and insurance are the four service sectors where exports are growing particularly compared to imports but cultural and creative, franchising and licensing and financial services exports are likely to decline on current trends over the next five years. Financial services in particular is an iconic sector for the UK because of its links with employment and the regional economy of London and this negative outlook ahead of Brexit negotiations is important for policy makers to bear in mind.

What this overview shows is the fragility of UK trade generally and exports in particular. Trade is growing quickly with Asia, and some of our top sectors and services look strongly placed ahead of Brexit negotiations. However, the fact that imports are growing quickly has to be seen in a context of an area of globalization. If globalization is thrown into reverse during the course of the next two years, not just because of Brexit but also because of increased protectionism in the rest of the world, especially in the US, this position is increasingly untenable as we return to an era where export strength is equated with national economic strength. While nobody really knows what will happen, any uncertainty will increase the downside risks in the current outlook.

February – Graph of the Month

6th February 2017

Where will the biggest impact of President Trump’s Executive Actions be? The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TPP) look to be things of the past. The North America Free Trade Area (NATFA) will be undermined by the ongoing diplomatic and trade disputes with Mexico.

Yet US trade openness, that is trade as a percentage of GDP, was, on average between 1980 and 2013, 18.6%. Compared to a global average over the same period of around 45%, this just demonstrates the size of the US domestic economy – US jobs are created domestically to a greater extent than they are from trade. It follows that it will be global trade, the flows and patterns of trade around the world that will be transformed if the decisions translate into real action.

Figure 1:          Annualised growth in US trade with top ten partners and regions, 2015-2020 (%)
Source:            Equant Analytics, 2017

However, the US will not necessarily be the main beneficiary of the “bilateralism” of its trade policy. Longer term growth to 2020 presents US trade policy with several issues (Figure 1) irrespective of the intent behind recent changes:

  • Imports from Asia Pacific will grow at over 1.5 times the rate of exports to Asia Pacific. China is the exception, where exports will grow more quickly than imports. But as the US imports from China at nearly five times the rate that it exports to China, the faster rate of export growth is unlikely to have much long term impact on US net trade.
  • Exports to NAFTA look likely to increase more rapidly than imports. NAFTA works well for the US and any trade war with Mexico or disintegration of the regional trade area could damage US exports as much as it hurts Mexico.
  • Germany argues that the ECB keeps interest rates low which keeps the Euro low; President Trump argues that Germany benefits from the low value of the Euro and certainly the US will be importing from Germany at nearly twice the rate of growth that it exports to Germany. We expect faster growth in US imports from both the EU27 and the Eurozone as well.
  • Howsoever great the desire may be to create a bi-lateral trade partnership between the UK and the US, the UK is the US’s sixth largest country trading partner and, as an export destination less than half as important as either China or Mexico. The momentum of trade to 2020 suggests that nothing between the two countries will change.

If the policy is to support US jobs, then the sectors that China and Mexico trade with the US are important indicators of how effective this policy will be.

China’s imports into the US are predominantly in electrical equipment (cameras, audio-recording equipment etc) and the levels are substantially higher than they are for US exports to China in the same sector. However, within the broad grouping of “electrical equipment” are a range of products and the US exports to China in products that are higher at the value chain in both computing and machinery and electrical equipment.

 

Figure 2:          US trade with China by top import sectors, 2016 (USD bn)
Source:            Equant Analytics 2017

The other two top sectors for Chinese imports include furniture and bedding, toys and clothing, and potentially this reinforces the economic nationalism that is now reflected in US trade policy.

On one level there is truth in the statement that the US has exported many of its low and middle skilled jobs to China. This has been deliberate policy and was the product of the “globalization” which drove company performance and which is now likely to be thrown into reverse.

Yet, China is the USA’s third largest export partner by country and its exports are worth $150.6bn to the US economy a year. Most of this export trade is at the high end of the value chain (semi-conductors, aerospace, pharmaceuticals, biopharmaceuticals and automotives) and as such, reflects the strongly research and skills intensive nature of US trade that has evolved through the process of globalization.

Mexico, in contrast, is a key part of a North American value chain in oil and gas, electronics, computing and machinery and automotives in particular. These are the top four import and export sectors between the US and Mexico (Figure 3).

 

Figure 3:          Top four traded sectors between the US and Mexico, annualized growth, 2015-2020 (%)
Source:            Equant Analytics, 2017

Other things being equal, the trade momentum on the face of it at present looks positive for the US: export growth is higher than import growth in electrical equipment and oil and gas, and while import growth is faster in computing and automotives, against the backdrop of a considerable deficit with Mexico, the US itself is exporting equipment to fuel Mexican infrastructure development at a rate of nearly twenty times the rate that it imports. This is again the process of globalization and has been the case since the mid 1990’s.

The drop in oil and gas imports from Mexico presents a double-edged sword potentially. The US has not exported its crude oil historically and although this changed under President Obama, there is still no recorded data in United Nation databased to confirm that it now exports crude to Mexico.  However, it exports refined oil back to Mexico at four times the level that it imports it. Mexico has been accelerating its oil refining capacity over the last 2-3 years and the drop in imports potentially reflects both an increased self-sufficiency in the country and a loss of export revenue to US oil and gas companies.

The implications for global trade that are emerging as a consequence of the way in which US trade policy has been articulated since the inauguration of President Trump are not all about avocados, although even here there is an expected slowing momentum from 7.5% growth in 2016-17 to just over 4% by 2019-20! What is at risk, however, is that already the momentum of trade between the US and its key partners appears to be slowing.

The slowdown reflects flatter global trade growth and the increasing localization/regionalization of global supply chains. Any policy that seeks to disturb what is already a fragile equilibrium, may well cause the tectonic plates of trade to shift permanently.

 

January – Graph of the Month

Equant Analytics
4th Jan 2017

The picture for global trade in 2017 is uncertain and likely to be dominated by the politics of trade rather than the economics. We are expecting values in world trade to increase in 2017 by less than 0.3% with 12 out of the G20 countries set to see either exports or imports, or both, shrink during 2017 (Figure 1). While we are expecting China’s exports to grow at over 4% this year, this is a long way from the heady days of 2010 and 2011 when trade grew at twice the level of GDP.

In the wake of the Brexit referendum, the UK’s exports are expected to see flat or negative growth in 2017. Similarly, imports are expected to increase only slightly. This is simply a function of the weaker sterling pushing export prices down and import prices up, but it sends a worrying signal for economic performance more generally as the effects of Article 50 are felt and broader uncertainty around investment begins to take hold.

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Figure 1:  Forecast G20 import and export Growth, 2016-17 (%)
Source:    Equant Analytics 2017

We are expecting the values of trade in mineral fuels (oil and gas),chemicals and precious metals (particularly gold) to fall back in 2017 (Figure 2).

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Figure 2:          Forecast trade growth: Top ten trade sectors globally, 2016-17
Source:    Equant Analytics 2017

This tells us two things: first, this forecast suggests that commodity prices will not increase significantly during 2017. The drop in the value of mineral fuel trade indicates that both global demand is slowing and that oil prices are not likely to rise much above their current levels during the course of the year. Secondly, the fact that precious metal trade is either static or falling back slightly may indicate that gold will not be used as a hedge against uncertainty in the way that it was in 2016. This is to be expected as interest rates in the US start to rise and yields elsewhere start to increase.

However, not all sectors are likely to see negative growth and consumer-driven sectors from cars through to aircraft are seeing robust, even substantial growth. This may provide a lead indicator that demand-led growth, particularly in China but also in the Middle East, may well turn out more positively than expected.

Where are the risks in 2017?

The risks in 2017 are likely to be politically driven. Figure 1 suggests that US imports are likely to fall back. With the Trump administration already beginning to alter its trade stance within the North America Free Trade Area and to increase its rhetoric about re-shoring jobs from China, this is unsurprising. Similarly, exports values will be higher simply because the Dollar will be stronger as interest rates increase.

Figure 1 also shows that Saudi Arabia’s exports are likely to increase. This has little to do with the price of oil and more to do with the fact that Saudi Arabia is increasingly trading with China rather than with the US. Saudi Arabia’s exports to China are now some $US 5bn higher than the value of its exports to the US and recovered more quickly from the drop in oil prices in 2015. The re-orientation of trade arguably marks a shift of Saudi Arabia in particular away from trade with its traditional partners.

However, although export trade in the MENA region is forecast to grow, imports are forecast to fall and this is a similar picture in Sub-Saharan Africa and South America (Figure 3).

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Figure 3           Forecast regional trade growth, 2016-17 (%)
Source:    Equant Analytics 2017

Demand growth, suggesting some form of economic recovery, is evident in Europe, Asia-Pacific (driven largely by China) and North America. However, the emerging regions like South America, MENA and Sub-Saharan Africa may see their imports fall back. This suggests that demand in these regions is weaker, reflecting weaker economic performance in 2015 and 2016. Similarly, bigger economies in the Asia Pacific region, such as Indonesia, Japan and Australia are also seeing weaker trade, showing the sustained underlying weaknesses in that region as well.

This is a real challenge for global growth. Emerging markets will be affected by the strength of the US dollar as interest rates rise and inflation builds in the US. US Dollar denominated debt will become more expensive and much of the strength of the North America region will be defined by politically-induced exchange rate effects rather than stronger economic performance in itself. 2017 looks to be an interesting year in every sense of the word, and much of this will be played out through the politics of trade.

Roasting over an Equant Fire

Merry Imports 2016

As we move closer to the festive season, it’s good to know that trade is booming – in the important sectors at least! This year, the UK will import some $633m worth of beer. This is 2% more than last year so clearly the Brits will be drinking to Brexit in 2017, whatever that may bring…

Mind you, when it comes to pure indulgence, the US will import over $2bn of chocolate. This is nearly 7% higher than in 2015 so President Elect Trump may need to hold back on revoking any aspects of Obamacare relating to dentistry!

Not to be outdone by the Americans, however, the Chinese are importing $188m of sweets and sugar confectionary. This is 5% higher than last year demonstrating clearly that China’s 13th Five-Year Plan to move away from consumption of intermediate goods and towards high-end demand is working.

Finally, the Germans are upholding the real tradition of wholesome food at Christmas; we would expect nothing less and their imports of Turkeys are over 4% higher than last year.

And on that note, here’s to the $32bn of global trade in wine this year! At least some of that, we hope will be offered to Father Christmas!