Country data, trade and deflation

In Europe, the Belgian economy, perhaps because of the physical position of Belgium in Europe, has often been seen as a leading indicator for the rest of the region. Belgium’s business confidence is presently falling to levels associated with deep recession. In addition, the ECB’s data on intra regional trade is also beginning to suggest an ongoing contraction in nominal trade values that is at least on a par with that witnessed during the recession in the early 2000s.

More optimistically,the US’ rate of nominal export growth is still positive at around 8% annualised, albeit that this is a notably slower rate than that six months ago but as for Latin America, Brazil’s trade data has been disappointing for some time (nominal exports were down 18% YoY in June, export volumes by 5%) and even Mexico’s (until recently) very rapid rate of export growth has cooled markedly over the last month or so.

Turning to Asia, Singapore has been a relatively safe port in the global financial storm, but over the last year the US$ value of Singapore’s non-oil trade has fallen by almost 10% and whilst the extent of this decline in total trade has not yet been as great as that which was experienced during the crisis of 1985, the Asian Crisis, the 2001 recession and the global financial crisis, the data is not much that better than that which was experienced during these particularly severe crises.

For Singapore itself, this situation is troubling given the reliance of the economy on trade flows and local property prices are now falling on an annual basis in US$ terms, and there should be concerns for the global economy writ large given that Singapore has been strong and is one of the more open economies, so can be seen as a sort of bellwether for global economic vitality.

Korean exports and business confidence are another signal for wider global economic trends. Currently, Korean export trends are on a par with those experienced during the near global recessions of the early 1980s and the early 1990s, but they are not yet as weak as those seen in the GFC and the early 2000s. Korean business confidence has recently declined very sharply.

It would therefore seem that if world trade is not in recession, then it must be very close to it right now, and the recent historical precedents suggest that the remainder of the world economy may not be too far behind it in this respect – so whereas only three or four months ago, financial markets apparently believed that the global economy was facing sustainable recovery, global trade data suggest that far from a recovery, we are experiencing a further lurch lower.

The weakness in the total trade data is worrying in its own right but the data suggest that there are also risks of deflation. Thus, US import prices for finished consumer goods into the US have been flat year to date and there are signs that they may now be beginning to deflate. Certainly US import prices for Chinese goods has fallen by half a percentage point this year despite China’s continuing wage inflation problems and Hong Kong’s various trade price indicators are suggesting slower rates of inflation or outright deflation with regard to Chinese re-export prices. Japan and Korea are both reporting export price deflation in contract currency terms and Japan in particular seems to be suffering from a decline in the US$-denominated level of its aggregate export prices.

The picture emerging is therefore that there are weak global trade trends coupled with ongoing deflation in world trade prices and this is not confined to commodities. In this environment, a continued focus on defensive investment opportunities is reasonably required.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla

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The Local Authority Treasurers’ Investment Forum September 25th, 2012, London Stock Exchange
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