On Tuesday, the World Trade Organization cut the 2015 global trade growth outlook to 3.3 percent from the previous estimate of 4 percent. What are the consequences of slower global trade growth for the U.S. economy and the gold market?
On the surface, global trade growth is not bad; it is actually picking up from 2.8 percent in 2014 and it is in line with the broader growth in the global economy which the International Monetary Fund forecast would expand by 3.5 percent this year.
However, the problem is that for many years before the 2008 financial crisis, global trade had regularly increased at twice the rate of the global economy (the annual average growth rate since 1990 has been 5.1 percent). In January, industrial production declined by 0.3 percent while world trade volume dropped by 1.4 percent from December, which was the biggest drop since 2011. Société Générale said that the world U.S. dollar economy (world GDP measured not in local currencies, but in U.S. dollars) was shrinking and entering a deflationary vortex.
According to the IMF working paper, much of the slowdown is structural due to the increase in China’s own production of parts (instead of importing), however we believe that weak global trade may be cyclical and indicates a global slowdown.
Just consider that the IMF cut its prediction for global growth this year to 3.5 percent from 3.9 percent it forecast one year ago, before oil plunged, the ECB began quantitative easing and interest rates decreased even more, sometimes into negative territory. Should not easing monetary policies, sliding currencies in many parts of the world and cheap oil boost economic growth?
They should, however the broader global economy is slowing down. We have already noted that entrepreneurs are contracting their operations, which is indicated by the declining Baltic Dry Index or the losses of Hyundai Heavy Industries, the world’s largest shipbuilder, sustained in 2014. Weak global demand was confirmed also by surprising Monday data from the Chinese General Administration of Customs. China’s exports shrank by 15 percent in March from a year ago and imports fell by 12.7 percent for a third straight month of declines.
What are the consequences of the slowdown in global trade growth for the U.S. economy? The impact on the U.S. economy is not simple, since the concerns about global economic growth may cause capital inflows into the greenback, as a safe-haven currency of an economy which is performing relatively well. This is probably why the U.S. dollar gained after Chinese weak trade data. On the other hand, the U.S. economy cannot decouple from the rest of the world, which was confirmed by the lowered IMF’s forecasts for U.S. growth at 3.1 percent (down from 3.6 percent) for this year and by shrinking imports and exports in February (U.S. exports fell $5.3 billion or 1.4 percent, while imports declined $7.9 billion or 1.7 percent on a year-to-date basis).
To sum up, world trade growth is slowing down. Part of the story may be due to some structural changes, however, there are many signs that the global economy recovery is weak. Granted that the linkages between markets are in place, the U.S. economy is not decoupling from the rest of the world, which may affect the Fed’s decision on the pace and timing of the eventual interest rate hike. The combination of slow economic growth and low interest rates should be supportive for the gold prices, since the demand for the yellow metal usually picks up when the economic climate is uncertain and the global economy is not doing so well.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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