November 25, 2014
Trade may be flagging, global growth at risk
With 90 percent of everything traded around the world travelling by sea, the fall in shipping prices is a sign worth paying attention to
While most investors are transfixed by trying to anticipate the next jurisdiction-hopping, tax-driven merger, there are small but growing signs that global growth may be headed for a slowdown.
Perhaps the most eye-catching figure is the collapse in the Baltic Dry Index (BDI), a market measure of demand for shipping capacity, which is down about 65 percent so far this year. With 90 percent of everything traded around the world traveling by sea, the fall in shipping prices, while probably overstating matters, is a sign worth paying attention to. The fall in the BDI is at least in part driven by lots of new shipping capacity coming online, but there are other indicators that trade momentum is slowing and could be taking global growth with it.
The volume of global trade fell outright in May, the most recent month measured, according to data from the Netherlands Bureau of Economic Policy Analysis, and momentum in global trade has been in negative territory for much of the year.
That makes the International Monetary Fund’s decision last week to cut its global growth forecast for this year to 3.4 percent, from 3.7 percent in April, easier to understand, though the underlying economic mechanisms are far from simple.
In part this is a pure story about the US, whose economy actually shrank in the first quarter at a brisk 2.9 percent annual clip. The IMF has downgraded US growth expectations to 1.7 percent for the full year, but this is far from being a sure thing. Though US manufacturing and consumer confidence are strong (the latter buttressed in part by peppy asset markets), housing has emerged as a weak spot, with mortgages reportedly hard to obtain and new home building slumping. Remember too that the US economic expansion is now in its 61st month, against an average expansion length since 1854 of just 39 months.
While the US is the engine, there are broad-based signs that growth is less healthy than it was at the end of last year, notably the fact that the annual rate of growth in the leading indicator put together by the OECD is now only a bit more than half what it was last November.
KEY ROLE OF FINANCING
This may not be a simple story of a cyclical slowdown. Public debt markets are red-hot, so much so that regulators are now trying to tamp down investors' enthusiasm for risky loans and bonds. But many markets which depend on bank-originated financing are having a more difficult time, at least in part because many banks are seeking to raise capital to conform to new regulations.
A 2013 survey by the Asian Development Bank found unmet demand for lending and trade guarantees equal to $1.6 trillion in trade. Banks taking part in the survey blamed a host of factors, all of which were tied in one respect or another to banking system capital and creditworthiness.
Along the same lines, rules drafted after the financial crisis intended to prevent another subprime mortgage crisis are, as is appropriate, making it harder for some would-be borrowers in the US to get credit.
A dearth of bank financing is also key to economic fragility in the euro zone, which is itself far more dependent on bank loans to fuel growth than is the US, which has larger public capital markets.
Euro zone loans to the private sector fell by 1.7 per cent in June from the same month a year earlier, according to ECB data released last week, a less rapid pace of contraction than the month before but still a sign of a massive credit crunch.
While the ECB has taken steps to make it more expensive for banks to park cash with it, and may move later this year to outright asset purchases, the process of rebuilding confidence in and of European banks will be a long one.
While we can’t know whether any of this indicates an upcoming global slowdown in growth, we can consider where one would leave investors.
Asset markets, to put it mildly, are not priced for a recession, or anything close. Expectations underlying valuations assume healthy profit margins, some overall growth and continued support from central banks in the form of low rates.
Nor are central banks well positioned. There is no room for interest rate cuts and the track record of asset purchases is mixed, and should we get a real slowdown, would look even worse.
Trade data is slow moving and hard to parse, but looks to be critical in coming months.
James Saft is a Reuters columnist. The opinions expressed are his own.