Sinking global trade

The World Trade Organisation (WTO) has said that in 2023 the volume of global trade fell for just the third time in 30 years. The 1.2% decline was largely attributable to high energy prices, inflation, and interest rates. However, the WTO is also concerned about the impact of tariffs on global trade.

The current biggest area of tariff tension is electric vehicles (EVs), where the EU has imposed tariffs of up to 37.4% on imports of Chinese EVs. This follows the 100% tariffs introduced by the US in May. China has already reacted to the EU tariffs by launching an investigation into EU pork imports.

The trade situation has also been affected by geopolitical events such as Russia’s invasion of Ukraine, the impact on energy prices and western sanctions. Countries have found themselves having to choose between strengthening economic ties with the western powers or a Russia-China axis. The WTO has highlighted the ‘fragmentation’ or trade between like-minded blocks, which is growing faster than trade across such blocks.

According to the International Maritime Organization, interruptions to trade routes can have a significant impact on the global economy, given that 90% of traded goods continue to be shipped by sea.  With reduced traffic through the Panama Canal due to lack of rain, trade friction has also arisen due to the ongoing conflict in Gaza, with container ship numbers down an estimated 90% from 12 months previously. By avoiding the Suez Canal, it can add 1-2 additional weeks of travel time and increase the overall shipping cost.

Interest rates have stayed higher for longer due to sticky inflation, but are starting to head lower, which should stimulate global demand. However, much still rests on the health of the Chinese economy, which faces many challenges, particularly its troubled property sector. Even before the EU EV tariff issue, many European companies were finding China a tough nut to crack. The president of the European Chamber of Commerce in China said it is ‘mind-boggling’ that since 2017 the volume of goods that the EU has sold to China has fallen about a third, even though China’s economy has been growing steadily. ‘I think it’s fair to say that Europe still remains a significantly more open market to Chinese companies than the other way around, and that is obviously something that needs to change.’

The WTO and IMF estimate that fragmentation and trade barriers could reduce global economic growth by between 5% and 7% in the long-term, if not resolved. The head of the WTO said, ‘we hope we don’t have a repeat of what we saw in the 1930’s. We had retaliatory tariffs, and it was downhill from there and everyone lost.’

World leaders, particularly Donald Trump, you have been warned – please take note!

 

What have we been watching?

 

Investor attention turned from the US election and the previous weeks global IT meltdown to the US earnings season. Tesla dropped by 12% on its results and there was another sell-off in technology shares, with NASDAQ dropping 3.6% in a day. This flowed from US tech into Asian and Japanese tech stocks. Alphabet (Google) dropped by 5% despite narrowly beating revenue estimates as focus turned to mounting AI investment. Investors appear to be becoming more concerned about the levels of investment being made in the development and adoption of AI without the revenue benefit.  

Besides looking for clues to the health of the global economy from company results, markets also focused on global ‘flash’ PMI business activity data for July, which remained mixed. This showed the UK growing but European manufacturing still in contraction. In the US, manufacturing was weaker than expected but countered by stronger services.

In the US presidential race, Barack and Michelle Obama endorsed Kamala Harris, who has now received a staggering $200m in donations. Polling looks very close, albeit markets appear to be taking the view that Trump may be the most likely winner as Bitcoin has risen 10% in the last week – Trump is a crypto-currency fan. In addition, the Russell US smaller companies index is up 11% this month. While some of this reflects rotation from the tech sector, it might also reflect potential Trump tariffs that would protect US manufacturers.

The situation in the Middle East has deteriorated further. The risk of an all-out war between Israel and Iran-backed Hezbollah has increased after the rocket attack on the football match on the Golan Heights.

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In the UK, the ‘flash’ July PMI service sector activity reading ticked up to 52.4 from 52.1 in the previous month, while manufacturing increased to 51.8 from 50.9. Meanwhile, the latest ASDA Income Tracker showed that UK household discretionary income grew by 12.7% in June to £240 per week, which is the third consecutive month of double-digit growth. The Bank of England (BoE) is meeting this Thursday to discuss interest rates in what is expected to be a close-run vote but may wait given Chancellor Rachel Reeve’s comments about potential public sector wage increases. In the meantime, she is expected to pave the way for cuts to public spending, tax increases and delays to some major infrastructure projects to fill a £20bn ‘black hole’ – albeit the numbers were there to be seen before the election!

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In Europe, the ‘flash’ July PMI manufacturing reading contracted further to 45.6, with both France and Germany looking much weaker. However, the service sector remained in expansion at 51.9 but was down from 52.8.

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In the US, the ‘flash’ July PMI manufacturing activity indicator was weaker than expected at 49.5, but this was countered by the service sector, which remained strong with a reading of 56.0.  However, US economic growth was stronger than expected in the second quarter of 2024, with GDP growing 2.8%. The Federal Reserve (Fed) is meeting to discuss interest rates this week, although markets are still expecting the first cut in September. Meanwhile, the Fed’s preferred inflation measure, the core PCE price index, rose by 0.2% in June, slightly more than expected.      

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The People’s Bank of China trimmed two key benchmark interest rates. The unexpected cut comes amid a lack of short-term stimulus from the recent Communist Party Third Plenum, but is it also indicative of the ongoing problems in China’s property sector?

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Brent oil dipped to $80 on demand concerns reflecting the mixed global PMI business activity data and the fact there were no major Chinese economic stimulus measures. It also looks as if Russia has been exceeding its OPEC+ production quotas.

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Finally, yet another chapter in the HS2 debacle and why politicians should never be allowed to make decisions in the commercial world? The National Audit Office has said that the new trains built for HS2 may have fewer seats than existing services and estimates seating capacity could be reduced by 17%. As a result, the Department of Transport may need to dissuade passengers from travelling by train at certain times. To make matters worse, some construction work will be done even though it is no longer required. For example, only three platforms will now be needed in Birmingham, but the full seven will be built because it would cost more to cancel. Only in Britain!

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Read Last Week’s Alpha Bites – A Softer Bank and a greener future

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.