Webcast 026 | Trade and economic outlook 2015: the Delta Economics view

Delta Economics CEO Rebecca Harding examines some of the main trade trends and challenges expected in 2015. Looking at issues such as disinflation that continue through from 2014, this Webcast discusses how much trade may grow this year and looks at some of the key countries and sectors that will be driving trade. The impact of continuing instability from geo-political tensions in the Ukraine and Russia as well as Syria and Iraq is also outlined with a view to understanding their likely impact on the global trade environment.



Webcast 026 Author  |  Rebecca Harding  |  CEO

Demanding times

Why Europe urgently needs to focus on long term competitiveness  |  The Eurozone has a problem, but not the one that policy makers thinks it has. On the face of it, prices falling by 0.1% between October and November, growth at 0.2% in Q3 and unemployment at 11.5% is quite enough to concentrate minds as ECB policy makers sit down at their next meeting on the 4th December. The ECB is coming under increased pressure to stimulate demand across the Eurozone in order to stave off disinflationary pressures that may result in deflation and hence raise the spectre of the Eurozone becoming like Japan: negative price increases alongside near-to-zero growth.

But the problem is not disinflation, nor even deflation as such. It is long term competitiveness and the policy paradoxes that have taken the Eurozone, and, indeed the whole world to the brink of a low inflation, low growth normality as oil prices continue to tumble.

Within Europe the problem is not the willingness to boost investment through Quantitative Easing (QE) and low interest rates. The ECB is already committed to sovereign Bond purchases for peripheral nations if those nations commit to structural reform, which, while contested by Germany and its Constitutional Court, represents a statement of intent. Alongside the promise for corporate bond and asset backed security purchases, the ECB is clearly in the market for some form of QE alongside negative interest rates if necessary.

The policy paradox is this: the solutions that are currently under discussion are aimed at the monetary side of the Eurozone economy while having the effect of contracting the real, demand, side of the economy. By definition, monetary instruments are being used to shore up the banking sector, to inject financial stability into the system and to reflate the economy by increasing the money supply. The hope is that by creating a financially stable system, credit conditions will loosen and, alongside structural reforms and austerity at a national level, will naturally generate growth over the long –term. But the austerity packages and national structural reforms alongside this flatten demand and therefore the capacity for the policies to work over the long term.

One measure of just how flat demand and of how important the drive for greater competitiveness should be is trade. The picture for Europe does not look good: the value of European exports is forecast to decline outside of the EU by 0.5% in 2015 which is a long way from the robust export-led growth that the region needs. Within European EU28 trade is forecast to decline by 3.5% and Eurozone trade by 3.7% over the next year, as shown in Figure 1 which illustrates imports trade within Europe and into Europe from non-EU countries.



Figure 1  |  Monthly value of intra and extra EU and Eurozone imports (USDbn)
Source  |  DeltaMetrics 2014


Imports from outside of the EU are forecast to drop by 1.45%. Much of the drop in imports from non-EU countries has to do with the falling oil prices (Figure 2). 7 out of the top 10 oil importers into Europe are not in the EU28 and as 30% of the EU’s imports in value terms are oil and gas, the link between falling import values and the reduction in oil prices is clear. There is a 94% correlation between EU imports from non-EU countries and the oil price: the flat trade forecast for 2015 therefore, suggests that there may be some small upward correction in oil prices but nothing substantial until the end of Q1.



Figure 2  |  Monthly value of EU imports from non-EU countries, June 2001-Dec 2015 (USDbn) vs NYSE Arca Oil Spot, Last Price Monthly, June 2001-Nov 2014
Source  |  DeltaMetrics 2014, Bloomberg


In theory, this helps the EU and the Eurozone because it reduces producer costs and, hence, arguably prices as well. Disinflation, which is simply falling prices, is catalysed by lower oil prices but does not in itself represent anything negative.

Of more concern is the forecast drop in intra regional trade between EU28 and Eurozone countries, which is forecast to fall by 3.5% and 3.7% respectively. Much of this trade is dominated by high-end manufactured goods, for example, automotives, consumer electronics, pharmaceuticals and machinery. If demand for these products is falling (Figure 3) then it suggests a deeper malaise within the system that is triggered by disinflation but leads ultimately to lower demand.



Figure 3  |  Europe’s demand problem
Source  |  DeltaMetrics 2014


Europe clearly has a problem: it’s demand for the higher end products that have defined its consumption patterns in the past is falling: demand for cars will fall by around 5% in 2015 and demand for medicines by 2.4% and 0.6% respectively. This matters for the world because, if demand is falling, then Europe has the potential to transmit its lower demand through the trade system to the rest of the world since it accounts for 44% of medicines, 34% of cars and 26% of computer imports across the world.

So if Europe is demanding less, then, accordingly, other countries will see their aggregate demand affected by the drop in trade to Europe as net exports drag further on global GDP. This is reflected in the forecast for European car and medicines exports, both top ten trade sectors for the world, which are set to fall by around 1% in 2015. As EU produced Pharmaceuticals account for 64% of all world exports, and cars for 50%, this suggests a tough year ahead.

All is not lost and the highest end, research-led exports from Europe, aircraft and biopharmaceuticals are set to grow significantly. In other words, the challenge for European policy makers is to ensure that Europe remains competitive at the highest end of the manufacturing supply chain where it already dominates global exports.

It is unlikely that the ECB will consider QE on Thursday and most economists expect any European QE to happen in Q1 2015 at the earliest. Delta Economics is of the view that European long term competitiveness is now a more pressing issue than addressing issues of disinflation. A substantial boost to European and domestic infrastructures, particularly to support high end manufacturing industry, is a necessary counterpart to any austerity measures to bring wayward budgets under control. Any QE at any point will be potentially necessary to stabilise international markets but not sufficient to fuel long term growth.

Webcast 025 | Trade drivers

Economic growth failed to materialise in 2014 after strong hopes at the beginning of the year that the world, and particularly Europe, would start to recover from the financial crisis. Back in January 2014, Delta Economics was way out of line with consensus and argued that trade would grow at just 1% compared to a WTO forecast that was saying trade would grow at 4.7%. 2014 has been dominated by global trends that have dampened trade and growth and these seem set to continue into 2015.



Webcast 025 Author  |  Rebecca Harding  |  CEO

Webcast 023 | Volatility on the rise?

Why Autumn and Winter look exciting | Delta Economics’ models all show a drop in trade towards the end of 2014 and into Q1 2015. While this may be caused by cyclical factors in the first instance, the fragility of the recovery is becoming evident and October was a month in which volatility re-appeared. We are forecasting that our trade corridor index correlated against sentiment indicators such as the PMIs will drop successively over the next three months, and while geo-political tensions, risks in Europe and the prospects for disinflation continue, fireworks during the global festive season cannot be ruled out.



Webcast 023 Author  |  Rebecca Harding  |  CEO

Webcast 015 | Risky returns

This webcast argues that the uncertainties in the Middle East, alongside evidence that recoveries in the US and UK are very much consumer-led, are dampening trade. South-South trade growth remains relatively flat, and Deltas forecast for Middle East growth has fallen back by over half of one percent to 4.6% in 2014.  Europe’s trade growth is forecast to fall back by 1% during the year, and while the outlook for Asia is not as bleak, the growth in exports of 5.7% is still too slow to create substantial economic growth.


Webcast 015 Author  |  Rebecca Harding  |  CEO