Regardless of ‘overly optimistic’ headlines from opinion pieces via the mainstream financial media – global trade isn’t looking so good.
Actually – things are declining faster than many realize.
Thus far in 2019 – many have seen the ‘shocking’ plunge in trade between the Asian economies – especially in China. (Well – shocking if you’ve only watched CNBC over the last 12 months).
For some context – China’s exports fell more than -20% in February 2019 alone.
And while many believe this is an isolated issue that will recover once the U.S. and China finalize a trade-deal – think again.
That’s because this collapse in trade is a global problem.
Just to give you some perspective – the World Trade Organization (WTO) recently published a new report that highlights the harsh decline in global trade momentum.
And to be exact – they believe world trade will “continue facing strong headwinds in 2019 and 2020” after growing slower than expected growth in 2018.
Take a look at the merchandise exports and imports of selected economies – between Jan 2017 – Feb 2019.
As you can see: all the major economies – from the Americas to Europe to Asia – are suffering sharp declines in their imports and exports.
Making matters worse – three key ‘leading-indicators’ (an economic factor that changes before the rest of the economy begins to go in a particular direction) signal slowing growth worldwide. . .
First – Global PMI – a measure of global new export orders – has contracted for the first time in three years. (Anything below 50 is considered a contraction – and vice versa).
Keep in mind that the last time the Global PMI contracted like this – the Federal Reserve postponed hiking rates for several months. And China sharply devalued their currency – the yuan – in attempt to reinvigorate export growth – which rattled global markets.
(And the time before that – in 2012 – the Fed under Ben Bernanke’s guidance launched Quantitative Easing round three – aka QE3).
Second – the WTO’s own World Trade Outlook Indicator (WTOI) in February fell to 96.3 – below its baseline value of 100. (Anything below 98 signals ‘below trend’).
Therefore – according to the WTO – expect global trade to continue slowing well into second-half 2019.
And Third – a continued plunge in the South Korean Export Growth Indicator – aka SKEG.
Many readers know I’ve written about SKEG and its importance many times before. But for those that need refreshing – here’s a quick summary:
SKEG is one of my favorite ‘leading indicators’ for tracking global corporate earnings (net income). And even though it’s been very accurate over the last 25 years – the mainstream hardly pays attention to it.
So the key takeaway here is – when South Korean export growth moves sharply in any direction – almost always global corporate earnings follow right behind it. (For some perspective – over the last 25 years now, the direction of the SKEG has almost perfectly preceded global earnings within a 12-month lag).
Take a look at the updated SKEG chart (red line indicates recent South Korean export growth year-over-year).
This shows us that South Korean exports have continued to sink. And according to history – corporate earnings will sink along with it.
Thus – all taken together – these ‘leading-indicators’ signal continued weakness ahead for the world economy.
It’s clear there’s an ongoing global slowdown – in trade growth, economic growth, and corporate earnings growth. (I highlighted the sharp plunge in corporate earnings momentum recently – you can read here).
These three factors indicate that the aggregate momentum is downwards.
And until this reverses – I don’t expect things will get much better.
So – expect this deceleration in world trade to continue. And for the mainstream financial media to continue being ‘shocked’.
Just don’t say you weren’t been warned.