Despite geopolitical uncertainty, we are forecasting that export growth in 2014 for the countries covered here will be positive. The UAE’s forecast is somewhat slower but it is the only country covered here that has slower growth in exports between 2013 and 2014 suggesting that the region’s larger economies by trade are integrating more into the global trade system. There is evidence of diversification in the region: five out of twenty five of the world’s top shale gas exporters are in the MENA region and countries like the UAE, Saudi Arabia, Oman and Qatar are showing sure but steady growth from a politically secure background and, critically, a substantial existing contribution to world trade.

Asia Pacific

Most obvious declines in estimated and forecast trade are in China, Japan and Australia in Asia. Australia is highly dependent on China as an export partner, particularly for its iron ore and coal and, as China’s infrastructure construction boom slows and China’s economic growth also slows, Australia’s forecast export growth is also expected to fall. Japan’s export trade has failed to pick up despite the devaluation of the Yen against the US Dollar and this trend is likely to continue into 2014 with exports pretty much static compared to a mild growth in 2013.

Yen for a change?

Why devaluation of the Yen is unlikely to boost exportsShinzō Abe could not have been clearer in 2012: reversing the appreciation of the Yen since the start of the financial crisis in mid 2007 would stimulate export-led growth and assist a general objective of reflating the economy through higher import prices. Assuming a J-Curve effect, where the trade deficit would close after a short time-lag following a currency depreciation his view was that the policy would change Japan’s economic fortunes sustainably for the better.

Last week’s news that Japan’s trade deficit had widened was a confirmation that the J-Curve effect is not happening in Japan. In fact, the Yen has been depreciating against the US Dollar since October 2012, before Abenomics, and there is no sign in the Delta Economics forecast that there will be any pick-up in exports for the foreseeable future. Our forecast for Japan’s imports in 2014 has fallen slightly from 0.77% growth to 0.75% growth since September, but our forecast for export growth in 2014 has dropped from 0.14% growth in September last year to 0.01% growth now.

Some of this is because of the general failure of world trade to pick up pace in 2014. Japan is being particularly severely affected by this. Figure 1 shows Japan’s largest export partners and its forecast growth in 2014 with each.



Figure 1 | Top ten largest export partners: forecast growth in exports 2014

Source | DeltaMetrics 2014


Trade with developed world partners is forecast largely to fall back this year with a particularly severe drop in trade with the US (-5.66%) and Germany (-1.31%). Even trade with its emerging economy partners in the Asia-Pacific region is not forecast to grow as quickly as we were forecasting in September 2013. For example, we were then forecasting that export trade with China would grow by 2.53% and we are now predicting somewhat slower growth at 2.42%.

The existence (or not) of a J-curve means that link between Japan’s trade and the value of the Yen per US Dollar exchange rate must be strong. Over the whole period, the correlation between the Yen in US Dollar terms and trade has been negative, at -0.48 which suggests both that imports may not always fall in line with expectations (rising when the currency depreciates) and that the relationship may not be strong enough for a J-curve effect. Figure 2 shows the trade ratio relative to the Yen-US Dollar exchange rate and demonstrates that the J-curve effect has not been working since April 2010.



Figure 2 | Japan’s exports and imports against Yen-USD exchange rate, 2001-2014 (Yen per 1 USD)

Source | DeltaMetrics 2014, Bloomberg


Between June 2001 and January 2004 the Yen appreciated and exports declined relative to imports. A mild depreciation of the currency in Q1 2004 led to an increase in the ratio which continued until mid 2007 when the Yen started its more than five-year appreciation relative to the US Dollar. Exports fell relative to imports during this period. The rapid increase in trade in 2010 explains the sharp increase in the ratio from Q2 2010, despite sustained appreciation of the Yen, and was a consequence of catch-up after the global trade collapse in 2009.



Figure 3 | Japan’s trade ratio (Exports divided by imports) against Yen USD exchange rate, 2001-2014 (Yen per USD)

Source | DeltaMetrics 2014, Bloomberg

However, what is really clear from Figure 2 is the sharp drop in the ratio after May 2011. This date is significant because it is 2 months after the Fukushima disaster. Exports relative to imports have not recovered since, despite mild depreciation of the currency from May 2011 and strong and sustained depreciation, arguably, since August 2011. In other words, the relationship between the Yen’s value and trade started to break down as early as 2010 when trade recovered from its global collapse.

The other striking observation from this chart is that the currency and trade are not especially correlated. There are few lags evident between a change in the currency’s value and a change in either exports or imports and over the period since the financial crisis, the correlation is relatively weak (-0.173) for imports and even weaker (-0.057) for exports. The negative correlation between imports and the Yen per US Dollar exchange rate points to a fact that as the Yen depreciates, imports will increase. Since 2011, this trend has become more obvious with the negative correlation strengthening to -0.606.

What might be behind this strengthening of the negative correlation with imports? Since Fukushima, Japan’s energy demand has been met increasingly by imports, particularly of Petroleum Gas, as illustrated in Figure 4. What this suggests is greater dependency on outside supply of energy and this is evidenced, not only in the increased imports of gas, coal and refined oil, but also in the fact that imports from Australia are forecast to grow by over 3% and from the Netherlands (which is a major oil and gas exporter) are forecast to grow by nearly 9% in 2014.



Figure 4 | Largest exports and import products: forecast growth in trade 2014

Source | DeltaMetrics 2014


A steady increase in mineral fuel and iron and steel imports has been evident in the data since before the Fukishima disaster, however. Since the post-trade collapse recovery, it is imports of iron and steel, not energy, into Japan that have grown most strongly. Although demand for mineral fuels did rise after June 2011, the acceleration was not actually as fast as the previous two-year period from mid 2009, as illustrated in Figure 5. And, as the graph also shows, since December 2012, imports overall of mineral fuels have remained relatively static with a slight dip towards the end of 2013.



Figure 5 | Top three import sectors relative to Yen-USD exchange rate, June 2001-Jan 2014

Source | DeltaMetrics 2014, Bloomberg

So is there any chance of export-led growth and a J-Curve effect? The decline in exports of Japanese cars of nearly 4% shown in Figure 4 is replicated at a sectoral level. Sector-level exports of vehicles, electronics and machinery, boilers and nuclear reactors seem impervious to changes in the exchange rate, as illustrated in Figure 6. Even during a period of strong currency appreciation exports rose and, since the depreciation in Q4 2012 exports have fallen.


Figure 6 | Japan’s Top 3 export sectors against Yen per USD exchange rate, June 2001-January 2014

Source DeltaMetrics 2014, Bloomberg


Assumptions about the J-curve and its impact on trade rest on a belief that policy can over-ride the power of markets to influence the value of a currency. Since the financial crisis, currency markets have sought a reserve currency alongside the US dollar and, until October 2012, the effect was the appreciation of the Yen versus the dollar. Abenomics has been successful in convincing markets that it is on a course to reflate the Japanese economy and set it back on a path of export-led growth. Recent data on the deficit suggest that the policy has had little effect so far. The ability of Japanese policy makers to over-ride the market will only last as long as the market belief in the policy is sustained. Delta Economics forecasts suggest that this might not be for very long and that any further depreciation, however desirable, might be because of lack of faith in Japan rather than a direct consequence of policy.

Trade and the Ides of March

Why the tide might not be rising | The International Monetary Fund (IMF) published its World Economic Outlook last week under the title, “Is the Tide Rising?”  For anyone struggling with floods in the UK at the moment, this title is either a bad joke or a timely reminder of the fact that economic forecasting, it is said, is designed to make weather forecasters look good.

The IMF expects World GDP growth to be higher, at 3.7% during 2014 rising to 3.9% in 2014 and while it points out the downside risks to the recovery, especially in emerging markets, there is a distinct air of optimism about the forecast.

Yet world trade, and the World Trade Organisation’s (WTO’s) outlook for world trade, remains flat with no return to the multiples of GDP that were seen prior to 2011.  The last forecast that the WTO published for 2013 was that world trade would grow and their own Head, Roberto Azevêdo was last month expecting the actual numbers to come in lower than that calling its relatively optimistic forecast for growth in 2014, of 4.5%, into question immediately.

The WTO is being characteristically positive at the start of the year as illustrated in Figure 1 which shows the forecast against actual trade.  The figure for December 2013 is provisional and will not be confirmed until April 2013.  The annual peaks in the forecast are in the first quarter of each year – Spring Tides, maybe.


Figure 1 | WTO forecast for World trade growth vs Actual growth: October 2011-January 2014

Source | DeltaMetrics 2014

The reason for the peaks in the forecast in the first quarter of each year are evident from a closer scrutiny of world trade data on a monthly basis, as illustrated in Figure 2.


Figure 2 | World trade growth: 2001-December 2014, actual and yeay-on-year

Source | DeltaMetrics 2014

NOTE: Data is actual IMF data up to September 2013, is Delta Economics estimates to January 2014 and thereafter forecast

Figure 2 unsurprisingly shows the big year-on-year drop in trade in 2009, but it is the time after that, especially since October 2010 that helps us explain why the IMF and WTO are optimistic at the start of every year.  There are cyclical upticks in trade in each year in Q3 and Q1 which, when examined as part of a “Net export” effect in GDP forecasts, have a multiplier effect.  However, what is clear from the analysis of year-on-year changes in Figure 2, is that the momentum has been downwards (both actual and estimated) since mid 2011 and that the pattern of post-crisis trade is actually substantially different to pre-crisis trade.

The other reason why the WTO and IMF may be over-optimistic in their start-of-year forecasting is because of the seasonal volatility in China’s trade data presented in Figure 3. Each year, a major drop in Chinese trade, visible throughout the period between December and January is upwardly adjusted by March leaving the trend trajectory one of growth.  These swings have been particularly obvious since the financial crisis and although there are similar seasonal patterns in Germany, the US and the UK but the swings are less marked.


Figure 3 | Selected Countries’ Export Growth, June 2001-December 2014

Source | DeltaMetrics 2014

Based on the IMF’s own data up as far as the end of September 2013 as these charts are, it is easy to see why Roberto Azevêdo might be cautious about trade growth in 2013.  However, historical growth is of interest only to economists attempting to establish the scale of the damage that is currently being done by the slow-down in world trade.

What is more worrying is that the lessons from past trends seem to be buried in the past as well and that more recent analysis of what is happening with trade is focused simply on a dogmatic assumption that world trade growth has to return to a multiple of GDP growth (often taken to be 2.5 times GDP growth) if the world economy as a whole is to reach an “escape velocity” growth.

Trade since the crisis exhibits different patterns, more volatility and much slower year-on-year growth than pre-crisis.  Evidence from sectoral analysis of trade suggests that this is because global supply chains are using local content to service local markets and that global regional analysis yields more insight into how this fuels trade within regions rather than between regions.  While trade between emerging economies, which is highly commodity focused, remains flat because of the current economic challenges they face, the effects of export-led growth will be limited.

The temptation is nevertheless to watch trade growth and assume that, if it picks up, it will lead automatically to an increase in GDP.  We can expect a market rally during March when, if past trends are replicated, the tide really does rise and Chinese trade data for Q1 is corrected.  While the Delta Economics’ forecast suggests only modest trade growth in 2014 at around 1.6%, and while this is substantially below the current WTO forecast, as Brutus said, “There is a tide in the affairs of men, which, taken at the flood, leads on to fortune.”  This may only be short-lived, and all forecasters (whether economic or weather) should beware the Ides of March.

Webcast 005 | Europe’s re-discovered growth

Dr Rebecca Harding argues in this webcast that Europe’s long term growth will be driven by its global supply chains and it is time for policy makers to focus policy on competitiveness as this is critical to Europe’s future. Europe’s car sector exports, for example, accounts for nearly 50% of world exports and the supply chain that supports this is woven into the fabric of intra-European trade as well as its trade with emerging economies. Through its key sector supply chains, cars, pharmaceuticals and hi-tech electronic products for example, Europe’s industrial strength will help to correct internal balances as well as drive trade globally. Exports to Brazil will grow by 5.2% in 2014, to China by 7% and to India by 3% despite relatively flat growth within Europe in 2014. This will ensure that recovery is sustained.


Webcast 005 Author  |  Rebecca Harding  |  CEO