Growth in world trade has been pretty lacklustre in recent years. Much of this weakness has been due to the hangover from global financial crisis. Political hostility to trade liberalisation, shortages of finance and sluggish growth rates have all weighed on exports.
When we last wrote about this, in late 2015, global trade volumes were growing at the slowest pace ever seen outside a recession.
Since then things have started to look up. Data from the Netherlands Bureau of Economic Analysis, released last week, shows that global trade volumes are rising at an annual rate of 5.1%, the fastest rate in six years. This is still way below pre-crisis rates, but it means that growth in global trade is, once again, outpacing, and reinforcing, global GDP growth which is also on an upswing.
Last week the International Monetary Fund raised its forecasts for the growth of the world economy to 3.5% this year and 3.6% in 2018. The improved global outlook has been driven by better prospects in Japan, a number of emerging market economies and, in particular, the euro area.
The turnaround in the fortunes of the euro area is especially pronounced. The Germany Ifo survey, the bellwether of business sentiment for the whole of Europe, is running at the highest level in its 25 year history. Investors have been flocking to buy euro area assets. Euro area equities have returned 23% so far this year and the euro has risen by 10% against the dollar.
While activity is accelerating across much of the world the UK is heading in the opposite direction. UK growth is slowing as higher inflation takes a toll on consumer spending power. You get some sense of the change in fortunes that UK house prices have scarcely changed in the last year while in the once-moribund German housing market prices have risen 11%.
The silver lining from sterling’s devaluation is the boost it lends UK exports. Add in the fact that growth in the UK’s core markets of the euro area and the US is recovering and the stage looks set for a rebound in export growth. As Ben Broadbent, a member of the Bank of England’s Monetary Policy Committee has said, a weak pound, a global recovery and, as yet unchanged rules and tariffs with the EU, puts UK business is in the “sweet spot” of the export cycle.
This is starting to be reflected in the economic data. After contracting through much of 2016 UK goods exports are growing at an annual rate of over 6%. Confidence in UK manufacturing, a sector which exports roughly half of what it produces, is running at the highest level in 30 years. It is indicative of a sector that is gearing up for growth that manufacturers are buying raw materials at the fastest pace since 1977.
Exports account for around 30% of UK GDP and stronger exports should help partially offset the effects of the consumer slowdown. Overall the UK economy is likely to post GDP growth of around the 1.5% mark this year, down from 1.8% in 2016. The composition of growth is likely to change more than the rate of growth - a weak pound is reallocating growth away from the consumer towards exports, manufacturing and capital spending.
So where does this leave UK interest rates? Our guess is that a slowing economy, Brexit uncertainties and subdued wage growth will keep UK rates on hold until next year, even as the Federal Reserve continues to raise US interest rates.
The good news is that global growth and global trade are heading up. For a UK economy facing Brexit uncertainties and a squeeze on the consumer, exports offer the best hope for growth over the next year or so.
PS - One of the articles on our summer reading list argued that the lures of computer gaming could explain why so many young American men are forsaking work: https://www.1843magazine.com/features/escape-to-another-world
A bleaker explanation was advanced in yesterday’s Sunday Times by the veteran US economist and commentator Irwin Stelzer. Mr Stelzer linked declining male workforce participation to opioid, heroin and marijuana addiction. Millions of Americans are unemployed or have given up looking for a job despite their being almost six million job openings. Drugs do seem to be playing a role. Mr Stelzer says that 25% to 50% of qualified job candidates fail routine drug tests.