International Trade: The Vulnerable Point of the Nascent Global Recovery

by: Econ Grapher

This week we look at the second estimate of U.S. GDP, U.S. house prices and consumer confidence, the Japanese unemployment and deflation picture, Japan's international trade, and New Zealand's international trade. In the analysis we arrive at a one line summary that says things are still chugging along in this post-great-recession environment, but risks are rising.

1. U.S. GDP

The second estimate of U.S. GDP came in slightly lower than the first estimate. The figure (SAAR) was 3.0% (or 0.8% q/q) against initial 3.2%, and consensus 3.5%. The year-on-year figure now sits at 2.5%, which, considering the depth of the recession, is not really all that impressive. The overall result is symptomatic of a gradual and fragile recovery. And although the risks have been repeatedly highlighted, they've only really taken on a real consideration as things like the Euro crisis, housing market weakness, and geopolitical situations (e.g. Korea), have surfaced. On that note, time to review the consumer confidence and housing market situation (below).

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2. US House Prices and Confidence

U.S. Consumer Confidence picked up strongly in May to 63.3 from 57.9 in April (beating consensus 59.0). On the components, present conditions picked up from 28.2 to 30.2, while future expectations jumped to 85.3 from 77.4 which is positive from an outlook perspective. On the housing market, the S&P Case Shiller index (20-City Composite) was basically flat in March. Consumer Confidence has increasingly become a proxy for unemployment and house prices. Particularly on the jobs side, Consumer confidence is now basically a second order metric of the unemployment rate, and it will probably only meaningfully recover once the jobs (and housing) market picks up.

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3. Japan Inflation and Unemployment

Japan saw worse figures on both fronts in April, with the jobless rate ticking up slightly to 5.1% from 5.0% in March (having gone as low as 4.9% after peaking initially at 5.6%). On the inflation (deflation) side Japan's consumer price index fell by -1.5% year on year; accelerating declines since the -1.2% decline in March (driven in part by high school fees), and showing no sign of respite in the deflation trap. Japan's economy has been recovering pretty sharply on a GDP basis since the height of the crisis. However, it still faces significant problems, such as those highlighted in the chart below (as well as fiscal issues). Indeed the main strength in the Japanese economy is the export sector (see below).

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4. Japan International Trade

Japan recorded stronger trade numbers in April, with exports growing 40.4% year on year to 5.89 trillion yen (beating consensus 38.9%). Imports also grew, rising 24.2% year on year to 5.15 trillion yen. This left the trade surplus at 742 billion yen (consensus 709), down from 949 billion in March. As noted above (and last week), this is the bright spot in the Japanese economy. Boosted by a strong economy (in part helped by strong stimulus spending) in China; and the global pick up in trade, boosted in part by the inventory cycle (of which Japan benefits from due to its large manufacturing base, particularly in electronics goods). So basically this is a bright spot and also a vulnerability for Japan. Any global double dip in international trade will stymie the Japanese economy.

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5. New Zealand International Trade

New Zealand recorded a higher surplus in April (NZ$656m vs NZ$590m in March, and consensus NZ$445m), due to a decline in imports (e.g. crude oil and machinery). Commodity prices and seasonal factors boosted soft commodity exports (dairy, agriculture, logs). Exports fell 2.2% from March to NZ$3.97 billion, led by the dairy sector.

Exports to China increased 44% to NZ$460 million, with China now New Zealand's second biggest customer (after Australia), as the free trade agreement signed in 2008 boosted trade ties between the two countries. The improvement is likely to be temporary however. Because as the New Zealand economy recovers, demand for imports will grow and interest rates will go up. This will strengthen the NZD (making exports less competitive).

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So this week we saw the U.S. economy slowly climbing out of recession, and U.S. house prices stagnating. Meanwhile, consumer confidence saw some respite. In Japan, the deflation situation worsened slightly, as did unemployment, but international trade (the main stay of Japan's economy) is still going strong. The global trade recovery picture was also somewhat echoed in New Zealand's trade results, with China also playing a key part. Owing, however, much of the improvement to cyclical factors.

Together the data supports a view of a fragile recovery from a deep recession. It also affirms the view of recovering global trade, driven primarily by cyclical factors such as inventory cycles, commodity cycles, and some residual impact from stimulus spending. International trade still remains a vulnerable point in the global recovery. A worsening of the Euro crisis or geopolitical events have the potential to scuttle the recovery in trade - which in turn would scuttle the still relatively nascent and fragile economic recovery. So in one line, things are still chugging along in this post-great-recession environment, but risks are rising.

US Bureau of Economic Analysis
Conference Board

Standard & Poors

Japan External Trade Organization

Trading Economics
Statistics New Zealand

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Disclosure: No positions