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Thursday June 25, 2009 - 23:16:58 GMT
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Forex Blog - World Recovery without World Trade? I Don’t Think So.

According to the WTO (graph below), world exports in Q1 2009 decreased by 22% from Q4 2008 and 31% from Q1 2008.  While we all know that the pace of decline in global economic activity appears to have peaked in Q1 and slowed since, down is down and even down a little from very much and very fast is not what I would build a green shoots global recovery argument on.  Decoupled and closed economies are assumptions for economic theory and modeling, not our reality.  There will be no sustainable recovery without the resumption of global trade.  And the mirror image is the decline in capital flows – equal decline in trade flows – and this is most impacting the developing world with few exceptions. 

Collapsing trade flows like capital flows, hit developing nations more than developed as the growth in trade through 2008 has grown around 12% per year but 24% a year in China and 20% in India where exports have helped propel economic development.  But even a glance at Japan’s exports (have to wonder how BOJ and MOF officials can say with a straight face that exports are less bad) shows a decline of 41% y/y in May (exports to the US down 45.4% y/y and down 30% to China) and this followed a 39% y/y decline in April.  China’s exports fell 26% y/y in May after a 22.6% April decline and the most to date since the global recession began in Q4 2008.  Euro Zone exports in April fell 27% y/y.  Canada exports are down 30.6% from July of 2008 through April 2009.  Hong Kong exports fell 14.5% y/y in May (peak decline was in February at -23%).  Taiwan exports fell 31% y/y in May.  Germany exports fell 28.7% y/y in April, the largest drop since WW2.    Brazil reported a 38% y/y drop in exports in May.  I don’t think exports are rising anywhere, not even oil producing countries on y/y basis.  I don’t have figures on it but world trade ex-oil has to be very depressed. 

The World Bank has raised its forecast for a decline in world trade to -10% from -2% last December and this kind of decline has not been seen since the Great Depression when world trade as a share of total GDP was much smaller (more concentrated).   Moreover the last time world trade was negative was in 1982.

If US consumption reverts to world trend or a long-run US average (until recently has been responsible for 30% of all export demand), I have a hard time believing that green shoots are anything to hang your garden hat on. 

If only declining exports were benign politically.  China has a “Buy China” mandate for government procurements, has placed duties on exports of raw materials (prompting WTO complaint from EU and US) and we have seen US Congress write into law its own “Buy America” plan.  Russia is moving as well to limit imports.  While we may not be looking at Smoot-Hawley and open trade wars ahead, the collapse in trade changes the political calculus in ways that threaten a deeper recession.

More probable is that export oriented countries will not be tolerant of a strong domestic currency or in other words a weak US dollar.  Actions from the SNB this week to drive the CHF down versus the EUR and USD (some say JPY) were significant…Swiss watch exports have truly collapsed.  BRIC currency reserves exploded higher in May when the dollar was falling precipitously.  Japan’s MOF is nightly reminding the world of the US desire for a strong dollar.  Can Eurogroup be that far behind? 

If there is no recovery in 6 months that lowers unemployment and lifts incomes, I think the new threat to the global economic order will be competitive devaluations and a fragile global economy may not escape the grips of deflation even with a “functioning” banking sector.

David Gilmore



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