Can global trade drivers lead to recovery?
According to the World Bank’s January 2017 Global Economic Prospects report, global trade growth in 2016 was the weakest since the 2009 global financial crisis. The cyclical and structural factors that affected growth the most include the following:
- cyclical drawdown in inventories across developed economies
- overall fall in imports, mainly driven by China and other major commodity exporters
- slowdown in global investments, which impacted global trade
Structural influences also played a crucial role in global growth. They included trade liberalization and the value chain integration across countries. The other factors that drove global growth include flexible trade policies, the macroeconomic scenario, and political stability, which supplemented the gains from trade.
Oil prices and the effects on global trade
The fall in oil prices from 2014 until the first quarter of 2016 could have impacted global trade. The value of global trade fell in 2015, largely due to falling commodity prices, as you can see in the above graph. The high demand from China for commodities such as coal and iron ore is mainly due to the construction boom leading to rising global resource prices. The global weak demand and trade war among nations could have a significant effect on growth.
China’s exports continue to struggle. December data show a fall of 6.1% year-over-year, which was more than expected. Chinese imports rose 3.1%. The downtrend in exports has led to some structural reforms for China. Most likely, China will shift its focus from the manufacturing and export sector to domestic consumption, with increased protectionism and uncertain trade policies. These policies are expected to have a large impact on global trade in the future.
The Shanghai Stock Exchange Composite Index (SHCOMP) rose about 7.0% in 2016. Apart from China, commodity exporters such as Australia, Brazil, Canada, and Indonesia also faced slowdowns in demand, negatively impacting growth. Exports fell last year, which has taken a toll on major commodity exporting markets.
The Global Commodity Equity ETF (CRBQ) rose about 4.0% in 2016. The VanEck Vectors Oil Refiners ETF (CRAK) rose about 6.0% in 2016. CRAK’s four top holdings include Royal Philips (PHG), Valero Energy (VLO), Marathon Petroleum (MPC), and Tesoro (TSO).