International Economic Week In Review: Is A Global Trade Slowdown to Blame?

In January, the World Bank issued its latest Global Growth Report, which contained a section titled, “Who Catches a Cold When Emerging Markets Sneeze?”It contained the following graph, which shows the slower pace of post-recession global growth:

The report argues the following five factors caused the drop:

1. Slower developed economy growth lowered global demand.
2. Weak capital investment also lowered developed market growth
3. A maturing value chain means developing countries are less important to the global flow of goods
4. Tighter financial conditions at banks lessen their ability to support trade
5. Trade liberalization slowed.

The report argues developed country GDP drops .4% for every 1% drop in BRIC growth. Assuming this to be accurate, we now have a fairly good idea regarding the causation of slower growth across the OECD’s bigger countries.

The ECBs’ rate announcement was this week’s biggest news.In addition to lowering several rates, the bank announced:

(4)     The monthly purchases under the asset purchase programme will be expanded to €80 billion starting in April.

(5)     Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases. 

Not only are they increasing purchases by 20 billion euros, they’re expanding these purchases to corporate debt.In effect, large EU companies can now issue paper directly to the ECB. EU corporations are more dependent on financial institutions than the bond market, making this a very important development. Draghi offered the following commentary regarding the program:

Third, we decided to include investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area in the list of assets that are eligible for regular purchases under a new corporate sector purchase programme. This will further strengthen the pass-through of our asset purchases to the financing conditions of the real economy. Purchases under the new programme will start towards the end of the second quarter of this year.

Eurostat released 4Q GDP figures, which showed a 1.6% Y/Y increase: 

In the fourth quarter, household spending increased at a moderate 2% rate.But business fixed investment picked-up throughout the year, reaching 3.5% Y/Y in the fourth quarter. Hopefully, the ECB’s plan is hitting at the exact right time, strategically, giving households and businesses reasons to spend. 

Over the last two weeks, the Australian Industry Group released their latest monthly readings of the manufacturing, service and construction sectors.Manufacturing’s 53.5 reading was the highest level since July 2010:

6/7 sub-indexes expanded while 4/8 industries grew. The service sector also expanded, although the headline number decreased 3.4 points to 51.8. While 4/5 sub-indexes were positive, only 3/9 industries were expanding. Construction, however, is contracting, with a 46.1 reading.Weak new orders are the primary reason:

Overall, Australia is in good shape. Despite the inherent drag from the drop in raw materials activity, employment for the 25-54 age group increased over the last year. This supported wage and consumption growth. This indicates the Australia economy is not a one-trick pony, totally dependent on exports to China.

Japan released a revised 4Q15 GDP report:

Japan’s fourth-quarter economic growth was revised up by 0.3 percentage points on Tuesday to a still gloomy annualised pace of -1.1 per cent, as the economy continues to stutter.

With the first quarter of 2016 also looking far from bright, the data revision highlights the lack of momentum in the economy that has prompted the Bank of Japan to launch negative interest rates and the government to consider a fresh fiscal stimulus.

The weakness of the data raises the pressure on the BoJ to consider further easing as spring wage negotiations reach a climax at the time of its policy meeting next week.

The 4Q data is still bleak:

The economy contracted 1.1%; declining consumer demand and weaker residential investment were the primary causes. In the last monthly data releases, the BOJ argued the economy would soon experience two virtuous cycles, one of which was low unemployment increasing wages, which in turn would lift spending.This has yet to happen.Residential investment did increase between 1Q15-3Q15, lowering the impact of the fourth quartercontraction. Even so, the decline is unwelcome news. On the somewhat positive side, the leading indicators only dropped .4 to 101.4, but the coincident indicators were up 2.9 to 113.8. But both indicators continue their respective trend sideways, indicating, at best, weak growth for the next 6-12 months.

The Bank of Canada maintained rates at .5%, offering the following appraisal of the Canadian economy:

Canada’s GDP growth in the fourth quarter was not as weak as expected, but the near-term outlook for the economy remains broadly the same as in January. National employment has held up despite job losses in resource-intensive regions, and household spending continues to underpin domestic demand. Non-energy exports are gathering momentum, particularly in sectors that are sensitive to exchange rate movements. However, overall business investment remains very weak due to retrenchment in the resource sector. 

Oi's price drop caused a technical recession in 2H15:

In other news, unemployment ticked-up .1% for the third consecutive month, rising to 7.3%.And capacity utilization dropped .1%. It appears the negative fallout from oil’s price drop has steadied.However, Canada will have a tough slog until oil’s price rebounds. 

Chinese news was mixed. The worst news was Monday’s announcement of a 25.4% drop in exports. While analysts expected the Chinese New Year’s to skew the data, its magnitude caught everybody off-guard.But, there isclearly a seasonality to Chinese export numbers:

CPI increased 2.3%; the 5.8% increase in food was the primary driver.  

Overall, the news continues to show a global economy of gradual, grinding growth. The EU actually appears to be somewhat stronger than analysts believe with moderate household and business investment contributing to growth.  Canada's economy has probably bottomed, but only after sustaining tremendous damage from oil's price drop. Japan continues its "two steps forward, one step back" pace of growth, while Australia is doing fairly well. Finally, Chinese news still shows a growing economy, but one whose pace of growth is slowing.