ECOGNOSISADVISORYLTDFromtheGreek:OIKONOMIKHΓNΩΣΙΣ(EkonomikiGnosis,KnowledgeofEconomics).Ecognosisisaglobalfinancial,economicadvisoryandinformationservice,coveringeconomicandfinancialdevelopments,equities,fixedincome,forex,commoditiesandotherassets.EconotesisaresearchpublicationavailablefreeonourinternetsiteandtothepublicinHongKong.Itisnotasolicitationforbusinessandneitherdoesitcontaininvestmentsuggestionsonspecificandnamedsecuritiesincludinganybuy,sellorholdadvice.ItiswrittenbyDr.AndrewF.Frerisbasedon48yearsofmarketexperiencewhichincludesseniorpositionswithGTCapital,SalomonBrothers,BankofAmericaandBNPParibasaswellassenioracademicpostswithuniversitiesinLondonandinHongKong

8/F, 2 Exchange Square, 8 Connaught Place, Central, Hong Kong. Tel: 852 3167 4591, Mob 852 9738 0944 Email: afreris@ecognosisadvisory.com Website: www.ecognosisadvisory.com

ECONOTENo.49 5/5/2016

Demystifyingthedeclineinworldtradegrowth

Summary InvestmentConclusions

There has been a growing concern that global trade has sloweddown more than warranted by the overall slowdown in globalgrowth.There is the added concern that even when the G3 (G4adding China) have clearly bottomed, trade will not recover withsevere consequences for the “trade dependent” EMKs. We showthat theevidence is notunequivocal and that, in any case, not allcountriesareexportsdriven,especiallyChina.Howeverthecurrentdeclineinexportsgrowth(anditsmirrorimageimports,somethingpermanently forgotten in commentaries) does have macro andcountry/sector implications, especially for commodities producers,includingoil,andforshipping.

Asitisdifficulttoprovethatthedecelerationintradegrowthisnotstructuralbutonlycyclical,thebestthatcanbedoneisto take a rolling one-year view rather than the apocalyptic“weareallgoingtodie”.Themacrooutlookforcommoditiesexporters stays negative,with oil prices likely to stay rangebound while supply is not under control. China’ bottomingwillnotbetradedrivenaswillalsobethecasewiththeUSandEU,whileJapan’scaseismorecomplexintheabsenceofdomestic growth drivers.Most commoditieswill stay underpressurebutsomesectorsinshippingwillcontinuetobenefitfromfirmfreightrates.

Thefacts,suchastheyarenot!

Fed has c

this couldbemisleading.Takingasexample,thepriceofoil,ithas fallen ,while volumesof oil tradedhas risen,potentiallygiving an overall falling valueof oil traded.For an economysuchasVenezuelaorRussiawithdepreciatedcurrencies,thedeclining overallUSD value could represent rising value inlocal currency terms. This has been partially true forArgentina’swheatexports.Hencedecliningvolumesandevenvaluesmayhavedifferentimpactfordifferenteconomies.

TheWTOhasforecasta2.8%growthofworldtradefor2016the same for 2015.In comparison, in 2011 trade grew nearlydouble that rate,whileduring thepre -2008crisisperiod theaveragegrowthwasaroundthe6.0%mark.Henceworldtradegrowthhasdeclinedverysignificantly.Fig1showstheexportsgrowthratefortheG4countrieswithallofthemonabroadlydecelerating trend since the sharp rise in 2010, the latterbeingtheresultofalowbaseeffect.ExportsfromtheUSmay,just, have bottomed, while China’s sharp spikes could beconcealing the start of a bottoming trend aswell. The samemaynot be true for Japan,while exports from the Eurozonecontinue to decelerate. The data in Fig.2 shows growth ofimports for the G4 all of whom looking as if they arebottoming. In interpreting thesedata (all invalue terms) it isimportant to keep several points in mind and specificallyvolumes, values and exchange rates. Volume and value oftrade can play havocwith this picture. During this period offalling commodity prices for some goods, such as oil, somepriceshavebeendownbutvolumesup.Actually,accordingtodatafromtheCPBWorldTradeMonitor,thevolumeoftradehasbeencontinuouslyrisingregisteringa40%overallgrowthbetween2009-2015.Value,however,isnowatthesamelevelasin2009,havingfallenalmostcontinuouslysince2011.Oneistemptedinstinctivelytogoforvalueratherthanvolume,but

Fig.1:Exp.Yoy%,US(red),EU(blue),Jap(Brown),PRC

(gr)

Source: Bloomberg

ECOGNOSISADVISORY–May2016

ECONOTENo.49

Freightbecomesfright,butdon’tblameChina! Fig2:Imp.Yoy%,US(red),EU(bl),Jap(Br)PRC(yel)zzz((brown),china

Fora long timenow theparlousstateof theBalticDry Index(redintheBox)hadbeentheproxyofthepoorstatenotonlyoftheshippingindustrybutalsooftheworldtradeingeneral.Butevenhere,thedangersofexpostulatingabout“shipping”without specifying individual sectors can be misleading.Drycargo, such as grains, ores, coal etc, have been hit by theslowdown, as have containers ( blue in the box). The latterhave also been squeezed by oversupply of capacity. At thispoint, it is important to point out the circularity ofthe”overcapacity”argument.Ifdemanddrops,evenifnotonetonofextrashippinghadbeenaddedtotheglobalfleet,therewill be “overcapacity”! As ordering and building ships taketime,entrance of new capacity can be unfortunately timed.Equallysurgesindemandcanhitlimitedcapacity.HowevernotallisbadasthedataintheFactBoxshow.

Source : Bloomberg

FACTBOX:Freightrates,notallcreatedequal!As

Altogethernow

We have left the analysis of the roleof China in all thislast.Someaspectsofthedecelerationofglobaltradecanbe attributed to China’s slowdown, especially in itsimports of iron ore, but not on its imports of oil, forexample. We have explored this and related issues indetail in past issues of Econotes ( Nos 40,46 )why theChineseeconomy isnotexportsdriven,as indeed isalsothe case with those of the US, EU and partiallyJapan.Hencetheslowdownintheglobaltradegrowthcannot be “accused” simultaneoulsy of causing the globalslowdownandbeingtheconseuenceof!Thelikelihoodisthat the long- drawn prorcess of recovery since 2007-8has taken an equally long-drawn out toll on trade. Lastbut not least, the usual accusation that China has keptthe CNY undervalued to support its exports during thistought period, always leaves out an important point.Ifthatwas true, thenChinadeliberately kept thepricesofits imports high thus partially negating the putativeadvantage of the “cheap” CNY given the very substatialcomponentofimportsinChina’sexports!Onecanneverwin!AndrewFreris(writingcompletedon4/5/2016)

Source:Bloomberg

As the green line shows, freight rates for Very Large CrudeCarriers (VLCC) have boomed reflecting the low oil priceswhich havemaintained demand for oil, the rise in supply asSaudiArabiarefusedtoleadsupplycontrolwhileIran,Iraqandpossibly Libya will be adding to oil flows, and US shale alsocontributing. Congestion in ports and refineries led to VLCCbeingusedas floatingstorage tanks!Whether thisboon toasectionofshippingwilllastfortherestof2016willdependonthe price of oil staying low thus maintaining this cycle ofevents,andthis isquite likely.Thecharts in theBoxpoint tothe likelihood that the drop in most freight rates may bebottoming, in linewith the evidence presented in Figs 1& 2.World trade trends arepointing to a verymodestbottomingout,morecyclicalthanstructural.

ECOGNOSISADVISORY–May2016