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Stuttering Global Trade Signals Continuation of Supportive U.S. Dollar Environment

- Shipping and air freight volumes slow in Q1, suggesting global growth to slow

- USD could be supported due to falling outflows to 'Rest of World'

- All out trade war unlikely, however, says Patheon's Shepherdson

International trade slowdown and global growth

Image (C) Adobe Stock

A marked slowdown in global freight activity in the first three months of 2018 potentially augurs poor global growth rates in 2018, a global wealth fund economist has said.

Such an outlook in turn suggests to us the U.S. Dollar should remain supported against its competitors as the flow of capital out of Dollars into higher-yielding assets in the rest of the world (RoW) should stall, or remain subdued or even reverse.

A popular theme through much of 2017 was that the Dollar would struggle as the RoW accelerated and outshone the US. But, this outcome might not transpire over coming months.

"Without trade, it is very hard for the global economy to grow," says Maire Owens Thomsen, the chief global economist at Indosuez Wealth Management.

The slowdown in shipping and air freight business in the first quarter of the year is an early warning sign for the trajectory in 2018, says Thomsen, who sees the growth rate halving this year and then slowing even further in 2019.

A big reason why the US Dollar has been on the rise over recent weeks has been outsized US growth compared to the RoW, so if that continues as seems likely given freight data and Thomsen's view, it should maintain the positive USD narrative.

"For the short-term, in the next 1-2 months I think the Dollar will go up on the back of the US economy showing some acceleration whilst the Europe, Japan and emerging market economies are not showing the same momentum," says John Normand, Head of Cross Asset Strategy with J.P. Morgan.

Global shipping prices are measured by the Baltic Dry Index (BDI), which monitors changes in the cost of transporting various raw materials. The BDI has fallen in Q1 compared to Q4, as Thomsen notes.

Sea rates

(Image courtesy of Bloomberg)

Rates for air freight also fell in Q1 compared to Q4.

June Air freight data

(Image courtesy of aircargonews.com)

Since then, however, April has seen a stronger-than-expected recovery in air freight prices on rising demand which has offset the dire predictions.

"Demand growth on the transpacific trade lane helped boost airfreight rates to their highest level of the year so far in April," according to aircargonews.com. "The latest figures from Drewry’s Sea and Air Shipper Insight report show that average all-in buy rates paid by forwarders to airlines on 28 east-west routes increased by 10.8% year on year in April to $2.87 per kg."

However, rates have historically picked up in April compared with March in line with a slight pick up in demand, according to the site.

Increasing trade protectionism by the United States is cited as the root cause of the slowdown in global trade, according to Thomsen, and the situation has echoes of the 1920s when the US adopted an equally protectionist stance, which led to a slowdown in global trade and growth.

"I don't mean to be alarmist by bringing it up again and again but I think we need to be reminded that without trade the global economy cannot grow," says Thomsen.

Furthermore, a worrying lack of respect for the international institutions put in place after the second world war is also seen as a negative development for the geopolitical outlook according to the economist.

"Now with the trump administration attacking trade in a unilateral fashion exactly like what happened in the 1920s rather than through the WTO, I think that is a very dark time for international institutions," says Thomsen.  

Yet fears of a fully-fledged global trade war may be over-egged, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics, who thinks the probabilities of such an event are very low.

Trump is the only person in the administration who wants a trade war, according to the Pantheon economist, whilst his chief advisors Larry Kudlow and Treasury Secretary Mnuchin do not. With little broad-based support for a strategy of unilateral dissent, Trump may not get his way, despite US trade being a longstanding concern ever since the 1980s when he "took out a full-page advert railing at the excesses of Japanese exports to the US," says Shepherdson.

The upshot for the Dollar may be positive in the short-term whilst the news that China has agreed to increase US imports by 25bn will probably also support the Dollar due to the increase in aggregate demand that figure infers.

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