Global trade has put in a strong performance so far this year. This is particularly encouraging news for emerging markets (EM), as their economies and equity markets tend to be more reliant on exports for growth than developed market counterparts. However, we do note that there seems to have been a pause in momentum recently for global trade.
Drivers of the trade recovery
While China has been hugely important to the trade recovery, a weakening demand trend is now evident. Meanwhile, Japan, which has been an unexpectedly strong source of export demand, also shows signs of losing momentum. If overall global trade is to remain supported, other sources of demand will need to grow. Based on our current growth forecasts, with the US, China and Japan set for slower growth in the third and fourth quarters than in the second, Europe is the most probable source of increased demand.
However, European demand so far seems to have proven more beneficial to CEEMEA (Central & Eastern Europe, Middle East and Africa) and EM Asia ex China than elsewhere. This contrasts with China's demand which appeared to generate broad based benefits. Historic data suggests this differentiation is likely to persist to some degree. Furthermore, geopolitical tensions are on the rise again, increasing the risk of protectionism and retaliatory trade tariffs, which could throw a spanner in the works for global trade.
Downside risks dominate
Overall, we see a negative balance of risks to global trade from here. Growth momentum is forecast to soften in Japan, the US and China and it seems unlikely that Europe can provide a complete offset. In addition, other supportive factors, like commodity price base effects and the technology cycle, are expected to fade. We do not see signs of a dramatic collapse but we do think positive momentum has peaked.