Emerging market export growth could fall sharply later this year if recent economic survey data prove a useful guide.
Based on the two manufacturing surveys that Capital Economics, a consultancy, considers have historically proved the best predictors of trade patterns, growth in emerging market export volumes is in line to slow “markedly” from 6 per cent year-on-year in the first quarter of this year to just 1 per cent in the third quarter.
“The latest surveys have deteriorated quite markedly and there is some early evidence in the most recent hard data that we are seeing a slowdown in EM export growth,” said Liam Carson, emerging Europe economist at Capital Economics.
Although Capital Economics thinks it is “unlikely” export growth will really fall as low as 1 per cent, any trade-related jitters would add to fears over the outlook for a number of emerging market economies amid a backdrop of a stronger dollar, rising US Treasury yields and, for oil importers, rising energy prices.
The “new export orders” component of the EM manufacturing purchasing managers’ index fell to a 16-month low of 49.6 in April (on a scale where 50 is the divide between expansion and contraction), Mr Carson noted.
As the first chart shows, this PMI measure has historically been closely correlated with “hard” trade data four months later, in this case the year-on-year change in EM export volumes measured by the CPB Netherlands Bureau for Policy Analysis, a widely followed source of such data.
While the CPB measure had been strong of late, with the three-month moving average pointing to year-on-year growth of 6.3 per cent in February, this would slide to 1 per cent by August — the lowest reading since the commodity crash in 2015 — if it followed the PMI reading all the way down.
Capital Economics’ other preferred measure, a weighted EM average of the “expectations for exports” component of the World Economic Survey from the IFO, a German research institution, fell to a 21-month low in February. Again, this has often tended to be a leading indicator of the CPB data, three months later in this case, as the second chart illustrates.
“There are already signs that a slowdown is under way,” said Mr Carson, noting that, in dollar terms, EM export growth softened in March and the available April data from early reporting countries such as China, Brazil, South Korea, Chile, Vietnam and Taiwan, “suggest that the slowdown continued last month”.
Goldman Sachs also noted slowing growth in goods exports from a basket of 11 emerging market countries it follows, which it contrasted with still robust retail sales growth in EMs, as the third chart indicates.
While EM export growth was always likely to soften this year — the 6 per cent growth rate reported by the CPB was unsustainably high and distorted by base effects from a soft spot a year earlier — it is less clear why the weakness appears to be concentrated in emerging Asia, as the final chart, based on the PMI data, shows.
Mr Carson speculated that if the surveys are reflecting fears about a possible trade war between China and the US, then it would be logical for Asia to be worst hit because it is more integrated into Chinese supply chains.
Bhanu Baweja, head of emerging market cross-asset strategy at UBS, said that, while South Korean export growth had fallen sharply in recent months, Chinese data had actually strengthened.
He suggested that the Korean numbers may have been hit by uncertainty over the recent renegotiation of the US-Korean free trade pact, but the data “bear close watching” because Korean export volumes “have historically displayed an even stronger relationship with global trade trends than Chinese trade data has”.
“Korea’s export weakness is somewhat concerning as it has been the bellwether of EM export growth,” Mr Baweja added.
Gabriel Sterne, head of global macroeconomic research at Oxford Economics, said the main measure he was watching was Chinese manufacturing output, which bears “an unbelievably close relationship to world trade,” but leads it by three months.
While this measure fell in March, it had risen in February, with the volatility meaning it was too soon to draw any meaningful conclusions as to whether there was cause for concern, particularly with the jury still out on whether the unexpected slowdown in eurozone economic growth in the first quarter of the year was merely due to seasonal effects or something more worrying.
Mr Baweja remained optimistic that EM export volumes would hold up in the next 12 months, noting that they are dependent on developed world import demand, “which looks healthy, notwithstanding the soft patch in Q1”.
Mr Carson was less upbeat, however, predicting that EM exports will be pressured by a likely slowing of economic growth in China in the second half of 2018, with any rise in global protectionism a further threat.
Longer term, he believed the world was “now entering an era where EM export growth is unlikely to outstrip global growth,” as it did in the period up until 2011, barring the depths of the global financial crisis.
“The new normal is going to be a scenario where EM export volume growth is probably running at the same pace as global economic growth. Around 3-4 per cent is probably a more sustainable pace,” Mr Carson said.