Chinese trade released on the weekend was terrible.
The data showed a further acceleration in the pace of exports decline (-6.9%) and the associated fall in imports (-18.8%). It’s fed into renewed concerns about the state of Chinese, emerging market and global growth.
As a result the OECD, in its latest economic outlook released overnight, said the global economy is going to grow at less than 3% in 2015. That’s its weakest pace of growth since 2009 – yes, the dark days of the GFC.
Angel Gurría, the OECD secretary-general, said in a speech overnight that the global economy is vulnerable again because of the collapse in trade that has occurred in China and emerging markets “since late 2014”.
“In 2015 global trade growth is expected to grow by a disappointing 2%. Over the past five decades there have been only five other years in which trade growth has been 2% or less, all of which coincided with a marked downturn of global growth,” Gurria said.
It’s a theme that was also highlighted last night by Nils Smedegaard Andersen, the CEO of shipping giant Moeller-Maersk, who said in an interview with Bloomberg that consensus forecasts for global growth are still too strong, despite already being trimmed from more optimistic levels earlier this year.
This is a clear warning not only on growth but also on expectations of growth embedded in financial markets globally.
That’s concerning because it’s China and emerging economies which have been doing the heavy lifting in global growth over the past few years, contributing the lion’s share of that growth while developed markets languished.
So the “outlook for EMEs is a particular source of global uncertainty, given their large contribution to global trade and GDP growth in the last few years,” Gurria said.
Crucially though, Gurria also highlighted the growing vulnerability of emerging markets that flows from increased leverage in these economies.
“Many have been hit by lower commodity prices, some by weak export demand,” Gurria noted. “Many EMEs have also seen a rapid accumulation of corporate debt in recent years. Volatile international capital flows could thus make servicing that debt much more difficult.”
The OECD say developed markets have recently been resilient to the emerging market weakness in an economic sense. But the massive build-up in debt and leverage in these markets, along with the heavy investment of developed markets funds in debt and equity in emerging markets, means any potential ructions are likely to spread quickly around global markets.
That is, of course, if emerging markets hit a tipping point.
But that is something the OECD is clearly warning about. It’s also something that the Fed, at its September meeting, and the Bank of England and RBA at their November meetings also noted and are clearly concerned about.
It’s hardly surprising then that commodity price from copper to iron ore and the energy complex remain under pressure or that the price of global shipping rates are heading back toward 5-year lows.
The question for markets though is whether the OECD, and consensus, is right and the global economy turns around in 2016 and 2017. Or whether it’s Nils Smedegaard Andersen with his finger on the pulse of global trade and growth who is proved correct.
Concerns about emerging market debt have gone away as the developed nation stock market rally has dragged risk sentiment higher again.
But, with stocks in many markets back near 3-month highs and the S&P 500 back near it’s all-time high, the outlook for trade, Chinese and emerging market growth could be key to how markets perform in the next 6 months.
That’s particularly the case with the Fed set to ignore its September concern about “conditions abroad” and raise rates in the US in December for the first time since 2006.
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