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Trade and the Ides of March | 17th February 2014

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.