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.