At the start of the year, most forecasters and observers – including ourselves – expected global trade growth to strengthen in 2014, building on the recovery that began last year. Yet, instead, trade momentum has lost steam recently. Demand seems to have turned more fragile, with reports that export prospects are subdued and uncertain. This is holding back investment and growth in export-dependent countries, which has spillover effects on other economies. A pattern is emerging. Since the 2008 global financial crisis, forecasters have several times predicted a decent recovery of growth of global economic activity and trade, before having to scale back expectations. This year seems no exception. These developments challenge the outlook for export-oriented Asian economies. We have lowered our growth forecasts for China, South Korea and Hong Kong and believe economic growth in many Asian countries may disappoint in the coming months because of the weaker-than-expected trade developments. Since the global financial crisis, overall economic growth has been modest and, in a break with the past, trade growth has hardly exceeded economic growth. Several reasons help explain this. Many recession-hit developed markets adopted belt-tightening and deleveraging measures after the financial crisis, while several embarked on deliberate strategies to rely less on domestic spending – including on imports – and induce more export growth instead. More recently, China’s economy has slowed, with import-sensitive components, such as real estate and corporate investment, particularly weak. The ensuing lower demand for commodities has reduced growth of incomes – and thus imports – in many commodity-exporting economies, notably in emerging markets. These trends look set to continue for the rest of the year. Global imports grew 3.4 per cent year-on-year in the first quarter, but this growth eased to 2.8 per cent in the second quarter, and further in July. Looking at month-on-month changes, recent trends look somewhat better, but the outlook remains unimpressive. Global import growth should continue at a decent rate, but not rise significantly in the second half of the year. Much of the lethargy in global trade stems from emerging markets. Overall import growth in developed countries held up at a modest pace through July, but it slowed in developing nations. Across emerging economies, only Africa and the Middle East did not experience a pronounced slowdown. In emerging Asia, import demand stalled in the April to July period – in large part because of China, where import growth has been tapering faster than the country’s broader economic expansion. While there’s no reason to expect a sustained collapse of imports in China, a rapid import recovery is not on the cards, either. Downward pressures on growth remain and real estate weakness continues to weigh on the economy. Meanwhile, Russia’s economy and external trade are clearly feeling the impact of the Ukraine turbulence and resultant trade sanctions. India is one of the few emerging markets where activity and import demand strengthened recently, and some further improvement can be expected. Among advanced economies, the outlook for the US looks to be among the stronger prospects. Its economic growth is still gaining ground, as is its import momentum. A faster pace of recovery is likely. Elsewhere in the developed world, however, there is cause for concern. In the euro area, economic growth stopped rising in the second quarter, and import growth halted in June. In Japan, economic activity and import demand slowed sharply in the second quarter, following the sales tax hike in April. While the economy is expected to recover in the second half of 2014, we do not envisage a sharp pick-up in growth and import demand. All in all, the outlook for global trade is unimpressive. In its October World Economic Outlook update, the International Monetary Fund scaled back its projection for global trade growth in 2014 to 3.84 per cent. That would be an increase of only 0.8 percentage points from 2013 – a much smaller acceleration than expected at the start of this year. While global trade should continue to grow at a reasonable pace, don’t expect a significant revival of global demand any time soon. This was one important reason behind our downgrade of China’s GDP growth a month ago; disappointing domestic demand was the other. We now expect China to miss its 7.5 per cent target for this year. We also revised down our GDP growth forecasts for South Korea and Hong Kong in recent months. Economic growth in other Asian countries should be watched as the unfavourable global trade developments may lead to further disappointments. Louis Kuijs is the chief economist for Greater China, and Tiffany Qiu is an economist covering China, with the Royal Bank of Scotland based in Hong Kong
