Last week, we saw a number of positive indicators in the global economy. Australia became the first major economy to raise interest rates causing the Aussie exchange rate to strengthen above $0.90 against the U.S. for the first time since August 2008. (Actually, Israel was actually the first to raise rates, but this was less notable.)
U.S. retail sales for September came in better than expected and Canadian unemployment dropped to 8.4 percent. Unfortunately, one key indicator of economic activity, global trade, remains off anywhere from 20% to 40% and trending flat at best.
Amidst the positive news last week, trade data for August was released by many industrialized nations. In my article on trade last month, it was clear that the uptick in U.S. trade in July was temporary, being mostly automobile related. The bright spot was seen in intra-Asian trade. The story in August is the broad lack of strength outside of the U.S. Even this strength may be an artifact of a weak U.S. dollar.
American exports grow but imports decline despite auto imports. The trade deficit in declined roughly one billion dollars as imports declined and exports to the United States rose in August. Monthly exports to Canada and Australia were up strongly, rising 7.4% and 24.3% respectively. This likely signals a return of investment in equipment for the mining and energy industries. Imports trended down on lower oil imports and fewer consumer goods purchased. Automotive related trade (imports and exports) stepped an additional 7-8% in August after even more substantial rises in July. These two months represent the period the “Cash for Clunkers” program that has now expired.
Oil continues to weigh on U.S. imports. While the average price paid for a barrel of crude oil up in August ($64.75) over July ($62.48), this was more than offset by a more than 9% drop in the quantity imported. Oil imports normally do taper off at the end of the American summer driving season but the number of barrels imported monthly is presently running 13% below last year.
Canadian manufacturing is rebounding but trade still sliding. The robust employment report out last week on the Canadian employment credited newly added manufacturing jobs for the drop in unemployment from 8.7% to 8.4%.
The present Canadian trade report contained little positive news. Exports declined 5.1% while imports dropped 2.8%. The trade surplus that Canada enjoyed in recent years has turned into a deficit. This trade gap widened to CAD 2.0 billion, a level not seen in the last decade.
Granted, the unemployment statistics were for September data while the latest trade figures were for August. Thus, the hopeful observer might speculate that September trade numbers would come in strong a month from now. The more pessimistic observer would credit the export declines on strong Canadian dollar. It is clear that the Bank of Canada sees the strong ‘loonie’ as a threat to the Canadian economy. The only question is whether they will follow the lead of the Swiss National Bank and intervene to weaken their currency.
Japanese trade remains solid in August. Last month when I wrote about July figures, Japanese trade was on a strong upward trend driven more pronouncedly by imports from and exports to Asia. This trend was broken in August as exports declined 7% and imports declined 3%. Such a modest monthly drop could be accounted for by seasonal and quarterly fluctuations as August remains one of the stronger months of 2009. August, the middle month of the Japanese fiscal quarter, is generally the weakest of the three months.
German exports hit a new low in August. Exports dropped almost 2% to 60.4 billion Euros. This is a new low for this economic cycle. Germany has suffered from a combination of weak auto demand and a strong local currency. Imports also declined leaving the surplus trade balance only slightly up from the beginning of the year.
Trade data from Germany and Japan have particularly defined 3-month patterns with the first and last months of the quarter being stronger than the middle months (February, May, August and November). Thus August relative to July may not be as meaningful as August relative to May (the middle month of the prior quarter) or February. In the case of Germany, the trend line (dashed black line) is flat to down. By contrast, this trend is up for Japan.
Australian exports declined for the fifth consecutive month in a row. The Reserve Bank of Australia surprised some investors when it raised its benchmark interest rate 0.25% to 3.25%. Clearly the RBA is not afraid of a strong currency. Even if the RBA had left rates unchanged, 3% would be high by global standards. However, Australia saw inflation exceed 4% in three years this decade. For most other industrialized nations inflation did not reach this level even once. The preemptive move is therefore understandable.
Unlike Canada, Australia has virtually no manufactured goods to export. Most of the exports are food such as gain and beef as well as raw materials like iron ore and coal. Like many commodities the raw materials are priced in U.S. dollars. As the Aussie currency appreciates, the value translated back into Australian dollars is lower but the price in USD to the customer is unchanged and thus the competitiveness of the country is unhindered. If reported in U.S. dollars (calculation is in the blue line in the chart above) exports would be trending upwards.
This may very well be the whole story on global trade: Trade is essentially flat across the board with minor variations accounted for by currency strength. Countries with strong currencies (Germany, Canada, Japan, and Australia), the trend is down as much of global merchandise are either priced in U.S. dollars or must compete on those terms. Japan may be the exception due to its strong trade with the rest of Asia. Countries with weak currencies (United States and United Kingdom) are showing more of an upward trend in exports.
Economic theory would say this is because a cheap currency makes the export industries more competitive. If the upward trend is only slight (which is the case for U.S. and U.K. exports), it may simply be a reflection of the same trade levels translated back into an increasingly devalued dollar or pound.
Disclosure: No Positions