- Trade uncertainty impacted global trade much more than tariffs via three channels: investment (delays in investment plans), consumption (saving rates increased globally) and inventories and prices. We estimate that while US tariffs hampered global trade growth by - 0.3pp in 2018, US-led trade uncertainty cost -0.5pp.
- Today the evolution of inventories in the US relative to China, a good advanced indicator of a deterioration in global trade growth, reached a historically high level of 4.5 as per our proprietary indicator. If China and the US fail to find an agreement in Q2, uncertainty would remain and both global trade and global economic growth could slow further. For each two months of trade uncertainty, we estimate the cost to be -0.1pp of global trade growth, and for each four months, -0.1pp of global economic growth.
- Provided that there is an agreement between the US and China in Q2 2019, we expect global trade growth to slow to +3% in 2019, and +2.7% in 2020 as global economic growth decelerates and corporates have little pricing power.
The cost of uncertainty is bigger than the cost of tariffs
"The biggest issue here is the uncertainty. Uncertainty is causing problems with planning," Sanjeev Gandhi, a member of the board of executive directors at German chemicals firm BASF.
After months of tensions, China and the US reached a trade truce at the end of 2018. While the two countries are working on a way to resolve their disagreements and certain tariffs have been slashed (on cars imported by China from the US for e.g.), global trade growth continues to slow. In 2018, it decelerated to +3.8% (after +5.2% in 2017) and advanced indicators for Q1 suggest more deceleration coming.
This is because remaining tariffs continue to weigh on growth. Secondly, the cost of trade uncertainty is building up. We estimate that while US tariffs hampered global trade growth by 0.3pp, US-led uncertainty cost -0.5pp last year.
Uncertainty hinders growth through three channels:
- Investment – Companies delay their investments and decisions on hiring while waiting for clarity on the outcome of US-China trade talks.
- Consumption – Consumers increase precautionary savings and delay purchase decisions.
- Inventories and prices - As demand slows and trade barriers increase in the largest economies, the least competitive corporates struggle to sell their goods. This leads to an increase of inventories and a slowdown of production, but also to a vicious circle where corporates start to decrease their prices to be able to sell their goods.
Figures 1 and 2 provide an illustration of these three sequences of impact. Figure 1 shows that investment growth in established exports markets (Japan, Germany and South Korea) slowed rapidly, especially in the second half of 2018, as US-led trade policy uncertainty escalated. Consumer spending growth slowed, too, as households envisioned a bleaker future in the wake of rising trade tensions.
Figure 2 shows how the development of inventory imbalances is impacting the global business cycle. To have a proxy of these imbalances, we developed an indicator based on the differential between the inventories built in the US (a less competitive market for merchandise export) and those built in China (more competitive). This variable is a good marker of global trade disruption, being particularly sensitive to rising economic policy uncertainty.
In a context of weaker growth of global demand and rising trade barriers, less competitive companies (here the US) built up inventories as they could not sell their products, while the most competitive ones (in China) reduced their inventories. Figure 2 shows that the spread between US inventories and Chinese inventories hit its highest level since 2005 in January 2019.
This “inventory glut” has material implications for the global trade outlook. First, it means that corporates will have to scale down their production in the near term and focus on selling their inventory. It also means that global trade prices will be depressed as corporates will probably use them as a tool to gain competitiveness. China already opened the door on that front. Producer prices have decelerated rapidly since last year and other Asian markets are following suit.
Figure 1: Demand indicators and US Trade Policy Uncertainty Index