World trade and manufacturing indicators continue to weaken. However, whereas this originally was a slowdown centred on the weakness of China’s and Eurozone import demand, from mid-2018, it has started to include the USA. Revisions to US data mean that its profit cycle looks more normal, but normal for an economy in which a cyclical downturn is no more than 12-18 months distant. This need not be deep (US domestic balance sheets are not overstretched), but world-trade growth has already slowed to zero simply on slower US growth. We expect a US contraction to take world-trade growth in 2020 negative for the first time since 2009. There’s no cushion anywhere else.
World trade volume growth
World-trade growth in the three months to May was -0.1% YoY. It was fractionally lower than this at the start of the year as inventory effects as a result of the staged introduction of the second tranche of US tariffs first boosted and then depressed shipments from China. These have dropped out of the data and trade numbers have resumed declining.
By geography, all emerging-market regions are weak but comparing YoY growth in the latest figures with trade growth six months and 12 months ago, it is Asian demand that stands out as disappointing. The Asian comparison is distorted by the boost phase of the inventory cycle. However, the conclusion that Asia’s contribution to world trade growth is now weak, is valid.
World trade volume growth by EM region
This is mainly a reflection of exports to China which given the import content of Chinese exports (around 55% for all exports, higher for higher technology products), is as much a reflection of weaker Chinese shipments to the rest of the world as is it of any weakness in Chinese domestic demand.
Weak developed-economy demand
Until November 2018, US import volume was growing robustly. Some of this was always temporary; the same inventory cycle visible in the Chinese data. However, though US import growth is still faster than import demand from Europe, it has weakened sharply in the past six months.
PMI sets a post-GFC low
Manufacturing trends are strongly correlated with trade; manufacturing PMIs provide an alternate and slightly more up-to-date presentation of the same fact. Globally, manufacturing continues to deteriorate. The 49.3 global manufacturing PMI set a new post-GFC low in July.
Global manufacturing PMI
In absolute terms, the most cyclical, export driven economies are (as would be expected) the weakest. That is the German-centric northern European supply chains. In Asia, only Korea and Taiwan are comparable. As with trade however, the weakness has shifted to include the USA. From the end-2017 peak, European economies’ manufacturing PMIs have declined the most but US-centric indicators have increasingly participated since 3Q18.
US manufacturing remains decent, but it is now weakening
This suggests that the “delta” in a global forecast has begun to shift from the weakness of China and (to the extent that China’s auto demand has been a swing factor) Europe to the USA. In absolute terms, US manufacturing remains decent, but it is now weakening. And, with other regions so weak, any additional drag is damaging. We expect the USA to slow over the coming six months as fiscal spending (which was a boost to growth in mid-2018) becomes a temporary drag.
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