In the land of the blind the one-eyed man is king...
"Market commentators are suffering a collective delusion. They look at world trade data and see a staggering decline! This morning, the Wall Street Journal reported the fact that South Korean exports were down 15% for August as – “evidence that China’s stubborn economic slowdown is damaging global commerce”. China is fingered as the principal culprit here, the theory being that its slowing economy is causing a decline in imports from its trading partners. And if you look at the data superficially, that is what you will see: China’s oil imports are down 43%, its iron ore imports down 45% and its total imports for the first half of the year are down 16%. Any Chinese policy action is now seen in the light of this “deepening slump”. On a global basis the story is the same: recent IMF data showed that global trade is down 15% year-on-year.
Actually, none of the above applies. All of those trade numbers are denominated in US Dollars. Due to the extraordinary rise in the Dollar, the value of goods denominated in Dollars will appear to have shrunk. This is most obvious in the case of oil and other commodities but it applies more generally. Global trade data expressed in US Dollars will capture unwanted currency effects - hence the value of trade globally appears to have shrunk. If you really want to see what’s going on you have to look at trade volumes. These tell a very different story: South Korean export volumes were actually up 4% in August, Chinese imports of oil are up 8% year-on-year in numbers of barrels, its imports of iron ore in tonnes are flat and total imports are at all-time highs in terms of volumes (as would be expected for an economy that is growing). Exports from China to the US, a trade figure that is less affected by currency translation because both Chinese and US currencies had moved in lockstep, are up 7% year-on-year. The same IMF report indicates that global trade volumes have grown this year, somewhat sluggishly but not far from the average. With markets in a tailspin, it is worth considering that the effect of the Dollar will fall out of the numbers next year. The perceived trade catastrophe will disappear and we will be left with something more closely approximating reality."
Chris Darbyshire, Chief Investment Officer, Seven Investment Management
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