28th August 2018 – A variety of indicators suggest the world trade boom is over and point to downside risks for our trade forecasts. We present two new synthetic indicators that suggest world trade growth is currently running at a little below 3% y/y but could slow to around 1% y/y by year end. One possible positive is that survey-based indicators are generally holding up better than ‘harder’ data.
Amongst the most negative signals are those coming from freight-based indicators and especially slumping German overseas industrial orders. These indicators also have relatively high historic correlations with actual world trade. Two new indicators we look at this time – copper prices and Maersk share prices – also show negative trends and have had leading indicator properties in the recent past.
PMI-style export surveys from the main exporting economies look more optimistic. But even they point to world trade growth slipping to around 3% y/y by year-end, compared to our existing forecasts for next year which are closer to 4% growth.
World trade growth has supported the global economy over the last two years but has been slowing in recent months. This Research Briefing surveys the latest evidence from our favoured indicators – and some new ones – and introduces a pair of new synthetic world trade indicators. The signals from the new indicators are downbeat, suggesting the risk of a sharp slowdown in trade growth into year-end.
Our new coincident trade indicator shows world trade growth running at around 3% y/y. This is well below the 6% y/y rate seen in 2017 and early 2018. The leading indicator, meanwhile, suggests world trade growth could drop to as low as 1% by end-2018. This implies downside risks to our baseline forecasts which see 4% growth in 2019.
Our two new indicators are based on six variables:
- PMI-type export surveys: our long-standing Oxford Economics world export indicator, based on such surveys for the US, UK, France, German, Korea and China, forms one of the variables
- Air freight data from IATA
- The RWI/ISL world container freight index
- German foreign manufacturing orders
- World copper prices
- The share price of container firm Maersk, which handles around a fifth of world container trade
For each variable, we have run regressions to determine what pace of world trade growth they are associated with and these estimates feed into our new indicators (full calculation details are in the box below). Currently, all the variables point to world trade growth slowing in the months ahead, albeit to varying degrees.
The most negative readings come from the air and sea freight and German orders variables. All these currently suggest world trade growth of 2-2.5% y/y. But the IATA variable suggests growth slowing to 2% by year-end, the RWI/ISL variable points to trade growth near zero and German orders imply world trade declining by over 5%. Importantly, the RWI/ISL and German orders variables also have relatively strong historical correlations with world trade (around 90% and 77% respectively).
Negative trends are also visible in our two new indicators, copper and Maersk share prices (down 9% and 27% y/y respectively). Both point to world trade growth below 1% by year-end. These have the advantage of being available at very high frequency and were decent steers for the world trade slowdowns in 2015-16, 2011-12 and 2007-08. False steers from these variables in the past have been largely to the upside.
One source of optimism is that survey-based measures are holding up better. Our export survey-based indicator suggests world trade growth is currently running at a reasonable 4% annual pace. But even this indicator suggests a slowdown to around 3% y/y trade growth by Q4. It is also possible that some of our other variables will pick up in the coming months, improving the picture. On the whole though, looking across all indicators, it appears the world trade boom is over.
Calculation of the new indicators
We regressed the monthly growth of world trade volume (from the Netherlands CPB) on the y/y growth rates of the IATA air freight, RWI/ISL container freight, copper, Maersk share price and German foreign manufacturing orders variables and on the level of the export survey-based variable. The coefficients from these regressions allow us to associate a given value of each variable with a pace of world trade growth. The coincident and leading indicators are then assembled as the simple averages of the estimated paces of world trade growth associated with each variable at a given point in time, smoothed by taking three-month averages.
Our regressions also suggested that the export survey indicator, copper prices and Maersk share prices lead world trade growth by 3-4 months while the RWI/ISL index, IATA data and German orders data are broadly coincident with it.
As a result, the new coincident indicator is based on the simple average of the world trade growth rates associated with the current values of the RWI/ISL, IATA and German orders variables and the world trade growth rates associated with three-month ago values of the Maersk, copper and export survey variables. The leading indicator is based on the 6-month annualised trade growth rates of the RWI/ISL, IATA and German orders variables and the current values of the Maersk, copper and export survey variables.
