On the day that Christine Lagarde warns that the world may be tipped back to a new 1930s-style Great Depression, it's worth pointing out that it's not happening so far. We have almost all the data now for November, and so far not only is the slowdown nothing like what happened at the end of 2008, but it's less dramatic even than the slowdown which accompanied the near-recession of 2000-2001.
In fact, NE Asia's exports showed positive sequential momentum in November, as did G3 imports in October (both the latest data).
(True, Christine Lagarde's analysis carries all the knowledge and authority of economics and finance which you'd expect from a French socialist labour lawyer. It's a shame that when she speaks, you never know whether its the French politician, the labour lawyer, or the judgement of the IMF that's coming out. Still, if you will appoint completely unqualified people to important jobs, you can't be surprised when they discredit the institution upon which they have been foisted.)
The hinge of world trade remains the link between Western import demand (US, Eurozone, and Japan) and NE Asia's exports (China, Japan, Korea, Taiwan). Plenty of lucrative careers have been sustained maintaining that these two will or are decoupling, but so far they haven't and you shouldn't be holding your breath. In the three months to October, for example, G3 imports grew 17.2% YoY whilst NE Asia's exports were up, er, 15.6%. Were I to plot the 6m sequential momentum of these two against each other, you'd barely be able to see daylight between them.
Now let's look at the dynamics of G3 imports a little more closely. In October, in dollar terms, G3 imports rose 14.9% YoY (US up 12.9%, Eurozone up 13.2%, Japan up 26%), and the rise of 2.1% MoM was 0.3 Sds above what one would normally expect in October. The six-month moving average of that momentum reading shows a reading 0.08 SDs from historic trends – ie, virtually no deviation whatsoever. (By the way, it is not weakness in the dollar generating these YoY movements: the dollar was down only 1.1% YoY against the SDR in October.)
Clearly, this is a less buoyant picture of momentum than we've experienced during the last couple of years. But it remains well within the range of 'normal', and miles away from the experience of 2008/09. I put a lot of emphasis on those momentum readings, because they express fundamental changes in direction sooner and more accurately than YoY readings. Compare what's happening now with what happened in the run-up to the end of 2008: the lurch down may eventually materialize, but it hasn't yet.
Now consider what's in that trade data already. Here's what I wrote about the data-flow last week, in Shocks and Surprises, Week Ending December 9th. “When we extract the detail from this mass of data, we confront a paradox:
- on the one hand there's a very sharp contraction in the trade in intermediate goods, which bodes ill for the short-term industrial output,
- on the other hand, the demand for capital goods is, so far, undiminished, which suggests that capex plans, and therefore expectations of how the industrial cycle will develop over the medium and longer term, are unchanged, and rather bullish.”
The point at which companies stop buying intermediate goods, is precisely when we should see the most abrupt short-term collapse in trade numbers. It should be happening right now.
So let's look at November's exports from NE Asia: we have the full data for China, Korea and Taiwan, and we have numbers for the first 20 days of the month for Japan). There's no denying the data is patchy and volatile: China's exports were up 13.8% YoY as were Korea's but Taiwan's export growth slumped to 1.3%, whilst Japan's (probably) rose 6.1%. Part of this – particularly Taiwan's problem, for example – are the result of specific sectoral weaknesses. But overall, the slowdown that's happening so far more resembles 2000/01 than 2008/09.
The danger, of course, is that I'm being complacent – that I'm the man flying past the 31st floor window murmuring 'well, it's all right so far.' After all, European politicians seem bent on subjecting the continent to the Euro for as long as possible, which virtually ensures the period before its failure will be one without significant European economic growth, and the period after its failure will be to some extent chaotic.
(See Mohamed El-Erian's excellent summary of the dynamics of the crisis, in Foreign Policy.)
But there are two reasons why even this outcome is likely to result in a milder downturn for world trade than currently seems likely. First, we are still starting from a very low base: G3 imports fell 28% in 2009 (12m to October 09), and the recovery of 2010 still left them 15% lower than in 2008. In the 12 months to October 2011 G3 imports were only 1% higher than they were in the same period in 2008. Second, whilst the collapse of Lehmans really was a surprise, the travails of the Eurozone most emphatically are not. Probably the only people in the world who don't know how, ultimately, this will have to end are Europe's politicians. It seems inevitable that eventually even they may have their moment of enlightenment – at which point, the very least we can expect is that the European Central Bank may discover an appetite for preserving the financial system rather than its virtue. Meanwhile, as I have tracked many times, the world's biggest financial centres (New York, London) have quarantined Eurozone banks as best they can. That quarantining can never be perfect, but we can certainly expect it's getting better with every working day.
So what matters is timing. If the breakup of the Eurozone can somehow be fended off until 2013, the ensuing chaos may have less of an impact than if it happens next week. Moreover, the trade data that's staying within normal bounds now may continue to do so throughout 2012.