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Global Growth Is Slowing Down

IT HAS been a consistent theme of this blog in recent months that global growth has been slowing, a fact some investors may have missed in the good news about American GDP. The latest confirmation came from the World Trade Organisation, which cut its forecast for trade growth this year from 4.6% to 3.1% and for 2015 from 5.3% to 4%. The WTO doesn't forecast economic growth directly; it takes its lead from other international organisations (Rabo Bank reckons the IMF is set to reduce its growth forecast in the next few weeks).

What is interesting from the WTO announcement is that even the revised forecast relies on a bit of optimism. Actual trade growth in the first half of the year was just 1.8%; the organisation is relying on a rebound in the second half. The first half regional numbers were revealing; Asia increased its exports by 4.2% but its imports by just 2.1%. In effect, it has been gaining market share. North America was more balanced, increasing exports by 3.3% and imports by 3%. Europe was predictably sluggish, increasing exports by 1.2% and imports by 1.9%. The real weakness came in South America which suffered a 0.8% fall in exports and a 3.4% decline in imports.

All told, developed economies provided the biggest share of demand; their imports rose 2.6% while those of developing economies increased by just 0.5%. In export terms, the developed economies continued to lose market share; their exports grew 1.6%, while those of developing economies grew 2.1%.

Sluggish growth in 2014 would confirm the recent trend. After a phenomenal rebound in 2010, trade growth slowed to 2.3% in 2012 and 2.2% in 2013. So what is going on? Part of the problem is the slowdown in emerging market growth detailed in a recent issue. In turn, this may be related to slowing Chinese demand for commodities (incidentally, Goldman cut its Chinese GDP forecast for 2015 from 7.6% to 7.1%); commodity prices have been very weak recently, with the widely-followed Bloomberg index dropping 12% since the end of June. Then there may be specific problems this year; the winter weather that seems to have hit US first quarter growth; the Japanese sales tax rise; the sanctions tit-for-tat between the west and Russia.

But it is still striking that most people think the bond markets are mispriced when a fall in commodity prices, weak inflation numbers in the developed world and those growth revisions would seem to form a pretty good backdrop for fixed income. (Worth noting the fifth consecutive fall in Germany's Ifo index as well.) The continued resilience of equity markets (despite yesterday's wobble) looks more of the odd one out.

UPDATE: And this just in from Citigroup

Our global growth forecasts continue to drift down, and we are cutting 0.1 percent off our 2015 forecast this month, and now look for global GDP growth of 2.8% this year and 3.3% for 2015 (at current exchange rates). This is the second consecutive monthly downgrade to our 2015 growth forecast, while in total we have cut our 2014 forecast by 0.5 percent (from 3.3% to 2.8%) since January. We make notable downgrades this month to 2014-15 growth forecasts for Argentina, Brazil, China, Denmark, Japan, Romania, Russia, South Africa and Switzerland, partly balanced by a slight upgrade to our 2014 US growth forecast.

Courtesy of the Economist

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