World Trade Growth to Stay Above Trend

Global trade in goods will continue growing above trend during the second quarter, the World Trade Organization’s quarterly outlook indicator showed on Monday.

The indicator, a composite published since the third quarter of 2016, showed a reading of 102.3, compared to 102.2 last November, Reuters reported.

All the indicator’s seven components were positive except for trade in electronic components, which fell to 94.1 from 103.3 in the previous quarter, possibly indicating a weakening of consumer sentiment, the WTO said in a statement. 

“Growth is still above trend,” WTO economist Coleman Nee told Reuters. "The recovery of 2017 seems to be extending into the first quarter of 2018 at least, based on things like strong export orders, strong air freight and container shipping and other indicators. So it seems like there hasn’t been any slackening of momentum.”

The strongest component of the index was container port throughput at 104.3, its highest score since the WTO began publishing the indicator. The WTO has forecast overall growth in world goods trade in a range of 1.4% to 4.4% this year, most likely around 3.2%, compared to an estimated 3.6% in 2017.

Those figures, published last September, were based on IMF economic growth projections that have since been upgraded by 0.2 percentage points, to 3.2% in 2017 and 3.3% in 2018. The WTO will update its 2018 trade forecast in April.

Trade disputes and international trade friction do not much affect the overall global trade picture, Nee said, since they tend to affect a particular sector in a particular country, and if one source of goods is restricted, importers often simply switch to alternative sources for the same goods.

A very wide-ranging dispute or a tit-for-tat battle could still create uncertainty and sap economic growth, but that would be visible in a GDP slowdown rather than directly in trade statistics.

“Trade friction between countries can throw sand in the gears of the global economy,” Nee said.

Reality Bites on Interest Rates

World growth prospects remain very strong for 2018 and are unlikely to be derailed by recent financial market volatility, but the balance of inflation risks is shifting, with implications for monetary policy, says Fitch Ratings in its latest Global Economic Update report Monday. 

Data released since Fitch's December 2017 Global Economic Outlook show world growth to have recovered even more rapidly than previously thought in 2017 and confirm that momentum has been maintained in early 2018, supported by rising investment, buoyant world trade, loose financial conditions and pro-cyclical fiscal easing. 

"Economic slack is diminishing rapidly, and against a backdrop of an even stronger global recovery last year than we thought, market concerns over inflation and forthcoming monetary policy adjustments have risen. This has sparked a rise in global bond yields and significant equity market volatility. But we see this primarily as a correction to an overly sanguine view on the US interest rate outlook rather than signaling any serious threat of a sharp economic slowdown," said Brian Coulton, Fitch's chief economist. 

Oil and QE 

The rise in oil prices in the aftermath of the extension of OPEC quota reductions, sharp falls in Venezuela's oil production and declining global crude inventories also adds risks to headline inflation. While many still expect the strong supply response from US shale producers to continue, there are upside risks to the $52.5/bbl (Brent) oil price forecast for 2018. 

The Fed looks increasingly likely to raise rates four times in 2018 following upgrades to its growth forecasts. Concerns about low core inflation have eased and will be further assuaged by the recent pick-up in US wage inflation to an eight-year high of 2.9%. 

The ECB is sounding much more confident about economic recovery and has acknowledged the recent acceleration in wages, even though core CPI inflation remains below the bank's comfort zone at 1%. 

Net asset purchases at €30 billion ($36.8 billion) per month through September 2018 are still the base case, but the chances of any extension or up-scaling are diminishing and ECB forward guidance is likely to start reflecting this in March.