A Shrinking Trade Pie

by Lakshman Achuthan, Co-Founder and Chief Operations Officer of ECRI

After years of extraordinary policy stimulus around the globe – aimed at pulling demand forward from the future – world trade growth has collapsed even further (top line in chart) since we last highlighted it publicly. Indeed, year-over-year (yoy) world export growth is now nearing zero.

This is happening even with everything “on sale” as yoy export price growth has plunged deep into negative territory (bottom line). After some four years of falling export prices, export price deflation had become almost as intense as in the depths of the Global Financial Crisis (GFC).

In essence, we have a shrinking trade pie. Unable to generate adequate domestic growth, economies are trying to grab a larger share of that pie through competitive devaluation. As we observed earlier, this amounts to war by other means, and all that’s happened recently is that it’s China’s turn to devalue.

As we’ve shown, global debt has grown to some $200 trillion, with debt-to-GDP ratios having risen in every major economy. These debts can be repaid over time either by generating sufficient real growth to do so; or by inflating away the debts, so that they can be repaid in currency that is worth much less.

But, as “the yo-yo years” make clear, real GDP growth has been stair-stepping down for decades in most advanced economies. In conjunction with the yo-yo years, export prices are exhibiting increasingly severe deflationary patterns – in both advanced economies and emerging markets.

Under the circumstances, in the fullness of time, all the major economies are likely to face a day of reckoning. Though this journey may well involve a rush to a succession of “safe” assets en route to that destination, many economies are all effectively circling the drain.

The last time export price deflation was this intense, not only was Chinese GDP growth even weaker than it is today, but also every G7 economy was in recession. It is ominous that the global trade pie is shrinking so rapidly today – with none of the G7 economies in recession – yet.