News of the week summary - 05/12/2024
Global trade growth on track to double this year
Global trade is on track to experience a substantial comeback in 2024, with forecasts indicating a more than twofold increase in trade growth compared to the previous year. This uptick is driven by several factors, including a reduction in inflationary pressures and the solid performance of the US economy, according to the OECD, IMF, and WTO (World Trade Organization).
After a period of sluggish growth in 2023, attributed to elevated prices, escalating interest rates, and low demand, the OECD anticipates global trade to expand by 2.3% this year, followed by a further increase to 3.3% in 2025. This is the result of rebound to cyclical recovery dynamics, with significant contributions from China and East Asia.
Echoing this sentiment, the IMF's latest "World Economic Outlook" projects a 3% growth in trade volumes for 2024, while the WTO forecasts a 2.6% rise in goods trade, following a contraction of 1.2% in the previous year.
This resurgence in trade has already begun to manifest in some of the largest EU economies, with the Eurozone registering its strongest growth since 2022. For instance, Spain experienced a notable boost in first-quarter growth due to increased external demand, while Germany and Italy saw heightened net exports driving economic expansion.
However, despite these positive indicators, it is important to note that global trade is not expected to fully return to pre-pandemic levels this year. Persistent challenges, including geopolitical tensions, regional conflicts, and economic uncertainties, continue to pose risks to trade dynamics. Governments' emphasis on national security, self-sufficiency, and support for domestic industries further underscores the need for cautious monitoring and measures to sustain the recovery in global trade.
EU and France leaders discuss economic concerns with Xi Jinping
During a summit in Paris this week, concerns over economic implications dominated discussions between Emmanuel Macron (president of France), Ursula von der Leyen (president of the European Commission), and Xi Jinping (president of China). Macron and von der Leyen raised alarms about the influx of low-cost Chinese imports into the EU this summer, stressing the need to shield European industries from unfair competition (what they describe as "dumping"). They highlighted the economic imperative of fair trade practices, emphasizing the EU's resolve to safeguard its companies and economies against the disruption caused by China's surplus production.
Xi Jinping's visit coincided with a surge in EU investigations into Chinese firms, particularly in sectors like electric vehicles, where France seeks to protect its domestic manufacturers. This underscores the economic stakes involved, as the EU grapples with industrial overcapacity concerns in China that could distort markets for green energy-related goods like electric vehicles, batteries, and solar panels. Macron addressed specific economic concerns, such as access to China's market for its exports, including cosmetics and agricultural products, which the Chinese president welcomed with enthusiasm.
While the EU's actions are motivated by economic considerations, the discussions also touched on geopolitical tensions, such as China's support for Russia in the Ukraine conflict. Von der Leyen urged Beijing to refrain from supplying lethal equipment to Russia and to enhance regulation of dual-use goods (that can be used for civil and military purposes).
Indonesian currency hit by hawkish FED stance
The recent hawkish stance of the US Federal Reserve, that has vowed to maintain rates high, has prompted Indonesia's central bank to take proactive measures to bolster the rupiah, the Indonesian currency. The Central Bank's director said it is prepared to provide additional support for the currency if necessary. This readiness follows the bank's intervention in the currency market last month when the rupiah reached its lowest value in years against the dollar. The central banker expressed confidence in the central bank's preparedness for potential scenarios, including a more hawkish Federal Reserve and heightened geopolitical tensions in the Middle East.
Indonesia's decision to unexpectedly raise interest rates by 0.25 percentage points to 6.25% last month was driven by concerns over a 5% depreciation of the rupiah against the dollar since the beginning of the year. The central bank cited worsening global risks and preemptively acted to ensure inflation remains within its target range. Additionally, the government requested state enterprises to limit dollar purchases. Other countries in the region, such as Japan and Vietnam, have intervened to support their currencies, while Malaysia and South Korea have indicated preparedness to do so.
High US interest rates make the Indonesian currency less attractive, as investors prefer to purchase dollars in order to invest in the more profitable American bonds and stocks. Indonesia is also experiencing a cycle of dividend repatriation by foreign companies, further increasing demand for the dollar. However, Bank Indonesia expects this trend to ease by the end of the month, making the rupiah's situation more manageable.
Swedish Central Bank cuts rates ahead of the FED
In a notable move, Sweden's central bank decided to cut interest rates for the first time in eight years, marking a departure from the US Federal Reserve's stance, which it had followed for over a century. The Riksbank reduced its main interest rate by 0.25 percentage points to 3.75 percent, prioritizing support for the Swedish economy despite potential currency depreciation. Following the Riksbank's decision, the Swedish krona depreciated against major currencies. Notably, Sweden's currency has been one of the weakest performers in the G10 group this year.
Erik Thedéen, the Riksbank's governor, expressed confidence that inflation has decreased sustainably, but acknowledged risks such as a weakening Swedish krona leading to higher imported inflation, geopolitical tensions, and the strength of the US economy.
This rate cut aligns with similar actions taken by other European central banks like the Swiss, Czech, and Hungarian, indicating a growing willingness in Europe to diverge from the US on monetary policy. The upcoming anticipated rate cut by the European Central Bank would further confirm this trend. Normally, the Federal Reserve sets the pace for rate changes due to the size of the US economy and the influence of its financial markets.
While the US economy continues to show solid growth and higher-than-expected inflation, Europe faces weaker economic indicators, allowing its central banks to consider lowering borrowing costs earlier than the Fed. The ECB is expected to start cutting rates at its next meeting if inflationary pressures continue to fade. Sweden's close trade ties with the EU make its economy sensitive to changes in the euro and ECB policy decisions. However, there are concerns that if European rates decline faster than in the US, it could lead to currency depreciation against the dollar, resulting in higher import prices and increased inflation.
Chinese imports of equipment for AI surge
China's trade sector was driven by a surge in imports of critical equipment essential for advancing artificial intelligence (AI) capabilities, according to official data from Thursday. The value of China's imports of automatic data processing equipment, including computers and components, skyrocketed by 50% year-on-year in the first four months of 2024. Additionally, imports of computer chips and other high-tech products recorded double-digit growth compared to the same period last year. In contrast, many other import categories, such as agricultural products, coal, and cosmetics, remained in contraction.
This surge in AI-related equipment imports played a significant role in propelling Chinese trade back into growth territory in dollar terms in April, following previous declines. April saw imports expand by 8.4% compared to the same period a year earlier. Exports also showed positive momentum, rising by 1.5%, meeting forecasts and overturning the previous month's 7.5% annual decline.
Beijing is relying on a resurgence in manufacturing, particularly in high-tech industries, to drive growth and offset challenges such as flagging property investment and weak consumer confidence. To support this goal, the Chinese government has introduced measures to stimulate manufacturing, including schemes to upgrade equipment and incentivize consumer spending on appliances. In the AI sector, China has implemented supportive regulatory measures, such as tax breaks and subsidies, to boost growth. However, domestic tech companies have faced increasing restrictions on tech exports from the US and its allies, posing challenges to the development of the technology.