The dollar value of exports from emerging market countries will rise next year for the first time since 2014, helped by higher commodity prices and modestly stronger demand, it is predicted.
The recovery may help allay some of the gloom around emerging market countries, many of which used strong export growth as a springboard for rapid economic advancement in the early years of this century, before the export boom turned to bust.
“We will see a lot of headlines about [emerging market export growth] picking up in the first half of 2017,” says Bhanu Baweja, head of EM cross asset strategy at UBS, who believes EM exports will show year-on-year growth of between 8 and 13 per cent in dollar terms in the first quarter of this year, “a complete postcode away” from the negative numbers currently being reported.
Mark Williams, chief Asia economist at Capital Economics, adds: “We expect that the performance of EM exports will continue to improve in 2017, with export values rising modestly in year-on-year terms.”
Emerging market exports have been declining in dollar terms since October 2014, a far longer, if less extreme, losing streak than during the 2008-09 global financial crisis, as the first chart shows.
This slide in the dollar value of exports has entirely been a price effect, driven by lower commodity prices. In volume terms, emerging market exports have continued to rise since 2014, even if volume growth in year-on-year terms has moderated to around 2 per cent, a fraction of the double-digit rates witnessed either side of the global financial crisis, as the second chart shows.
In contrast, the average unit price of emerging market exports has been falling in year-on-year terms pretty much since mid-2012, hitting a year-on-year decline of 16.4 per cent in February 2016.
With the prices of most commodities having recovered somewhat since February 2016, the year-on-year fall in unit prices has slowed to around 5 per cent.
As a result, in the first 10 months of 2016, the year-on-year decline in EM exports in dollar terms was just 6.6 per cent, according to calculations by Capital Economics, a marked improvement on the 11.6 per cent contraction seen in 2015, as the third chart illustrates.
Mr Williams notes that early November data from the likes of Brazil, Vietnam, Taiwan and Chile suggests the picture has continued to improve since October.
With Capital Economics estimating that global economic growth will edge up to 2.8 per cent this year, from 2.5 per cent in 2016, “the exports of the emerging world’s net commodity exporters should rise by about 20 per cent year-on-year in dollar terms,” he argues.
The impact will also ripple out to some net commodity importers, Mr Williams believes, with higher commodity prices likely to boost the price of resource-intensive manufactured goods such as steel, bolstering the value of exports from the like of South Korea.
Mr Baweja agrees with this conclusion, noting that both South Korea and India, another net commodity importer, are exporters of refined oil products, the dollar value of which should rise this year.
But although he foresees a “noticeable pick-up in exports” in the first quarter of 2017, the UBS man is keen to play down any euphoria. He believes year-on-year growth will weaken and maybe even turn negative by the second half of 2017 because “volume is not picking up in a big way and the base effect [of last year’s weak commodity prices] will fall off” during the course of 2017.
In terms of the volume of exports from emerging markets, Mr Baweja would not rule out growth of around 4-5 per cent. But while this would represent a modest improvement on recent years, growth at this rate would still be “in the bottom quartile over the long-term distribution, even maybe the second decile”, given that median growth has been about 7 per cent a year over the past 25 years.
Mr Baweja’s extensive analysis on the changing nature of globalisation suggests the prime factor behind the weakness of global trade growth (which for a long time expanded at twice the rate of global GDP) has been a slowdown in investment.
With this in mind, he does anticipate a pick-up in US investment “because it has been so weak - we don’t normally see it grow at a lower pace than consumption except in a recession”.
However, this may be balanced by a decline in European and Chinese investment, with the impact of the latter on global trade heightened if China was to engineer a partial switch from investment in resource-heavy construction to forms of infrastructure spending such as water purification that are not very commodity intensive.
Mr Williams’ medium to long-term view is arguably more gloomy than that of Mr Baweja. He believes the 25-30 year period during which growth in global exports far exceeded that of global GDP, represented a “surge of globalisation that has come to an end”. In other words, the current slowdown in trade growth is structural, not cyclical.
“Through the second half of the 20th century we had this big dispersion of trade and economic activity around the world. All this specialisation meant exports rose faster than GDP,” Mr Williams says.
With China now not only “fully integrated”, but perhaps starting to retreat from this position as it brings more of its supply chain onshore, unless Africa can succeed in following China’s path, he adds: “I think we are going back now to a situation where we don’t think there is any particular reason for trade to grow faster than GDP.”
Other commentators, such as Raoul Leering, head of international trade analysis at ING, the Dutch financial group, fear the outlook is bleak even in the short term.
Citing recent figures from the CPB Netherlands Bureau for Policy Analysis, that show global trade in seasonally-adjusted volume terms fell 1.1 per cent between September and October, Mr Leering suggests last year will prove to be the worst year for world trade since 2009.
Moreover, a “turnaround in the short run is unlikely”, given China’s efforts to rebalance its economy from exports towards consumption (thereby reducing demand for imports of intermediate inputs), reinforced by “government policy to stimulate the use of domestic suppliers” and rising protectionism elsewhere, he argues.
“Since these developments will not fade overnight, there is little hope for a trade revival in 2017,” says Mr Leering.
