KCIC WEEKLY ANALYSIS ON ASIA
The global economy never fully recovered from the financial crisis. Following the temporary rebound in 2010, world real gross domestic product (GDP) grew by a mere 2.5 percent per annum, compared to an annual average growth rate of 3.1 percent in the twenty years leading to 2007. The global economy remained weak in 2014 with no major change expected for this year. In fact, many organizations have begun downgrading their outlooks for 2015. This month, the World Bank cut its forecast for global GDP growth this year from 3.4 percent to 3.0 percent, which still remains high compared to other forecasters. Despite economic strength in the US, UK and India, the rest of the global economy will remain weak; namely in the euro-zone, Japan and BRIC economies (Brazil, Russia, India and China).
In the last two years, global trade, the sum of world exports and imports, hardly expanded. According to International Monetary Fund (IMF) figures, trade grew 2.6 percent YoY in the nine months leading to September 2014, 1.5 percent in 2013 and 0.5 percent in 2012. Although the trend is positive, the growth rate is still much lower than the pre-crisis average of 9.3 percent YoY (1988-2007). Cyclical factors are one reason behind the slowdown in global trade and its bearish outlook. On one hand, the subpar consumption growth rates in major economies will translate in lower import demand, hampering exportintensive economies. On the other hand, lower oil and other commodity prices is dampening the reported trade numbers even if the quantity sold is unchanged. Oil exporters such as the GCC are already affected by lower export rates.
The weakness in trade is also partly due to a structural shift. First, the two largest economies (US and China) have managed to attract larger parts of the supply chain. Because more products are produced domestically they need to import and export less. This is evident in the decline in Chinese imports of parts and components - from 60 percent of total imports in the mid1990s to 35 percent today - and the reduction in US manufacturing imports as a share of total imports. Second, it has become more difficult to finance trades since the crisis. Recent financial crime regulations have limited trade flows. Higher capital requirements under Basel III planned to be implemented in 2019 also suggest constraints ahead. According to a 2014 International Chamber of Commerce survey, 71 percent of banks expect export finance to be negatively affected by these changes. In order to return to the doubledigit trade growth rates witnessed before the crisis, some of these structural challenges need to be addressed.
Cyclical factors however can rapidly change. Current market trends may help some economies exit today’s business cycle stage earlier than expected. First, lower oil prices; slashed prices should boost the disposable income of net energy importers, such as China, India, the euro zone, Japan and, to a lesser extent, the US, helping boost trade volumes. Second, the US dollar appreciation; the stronger dollar will facilitate the depreciation of most currencies, creating greater competitiveness for these economies and boost exports. These two market trends are widely expected to continue this year and may support trade levels.
Given the current global environment, a surge back to pre-crisis trade growth rates is unlikely in the short-term. However, as the US and China reduce their reliance on trade and regulations come into play, world trade will expand, although in a more fragmented and selective manner. Given the current market trends, winners in the shortterm will be the Asia’s less developed economies, such as the ASEAN countries, who will take advantage of the lower oil prices, and the GCC, who will be protected by the US dollar peg. These two regions will continue to benefit from their competitive advantage. In a period of weak global trade, the GCC and emerging Asian trade partnership is becoming increasingly important.