A recent article in the Wall Street Journal explores how exports and imports of goods are lagging far behind their pace of past expansions, threatening future productivity and living standards.
For decades, during periods of economic expansion, the growth of total imports and exports usually outpaced world GDP growth. However, during the past 3 years, the rate of growth in global trade can’t even match GDP growth.
During the first decade of the new millennium, the world saw a burst of globalization, thanks to the huge expansion of emerging economies including China. A lot of production capacity was built during this period in order to meet the huge appetite of these growing economies.
Trade Growth Not Following GDP Growth
As the article points out, since rebounding sharply in 2010 after the financial crisis, trade growth has averaged only about 3% a year, compared with 6% a year from 1983 to 2008. Much of the slowdown comes from the sluggish performance of emerging economies, including China, compared with their brisk growth in prior decades.
What matters most to us is that the the lower growth is not just explained by stable Chinese exports but by a big decline in imports from China.
The result is clear, demand in China is not only slowing but China is overproducing trying to catch up with its growth expectations. The result is an accelerating seepage of surplus into international markets. All of this while international production that was supposed to meet China’s stellar demand growth is not finding a home.
The result has been a falling commodity market in which decline has steepened over the past year. Equity markets, however, managed to decouple from commodity prices but the evidence of weak global demand is already hurting the shares of companies around the globe as eventually we must see some damage if this oversupply doesn’t find a home.
So What’s Going To Save Commodities From Oversupply?
With China’s GDP being at least 5 times bigger than any other growing economy, including India, it’s hard to imagine demand coming from elsewhere to clean up this mess. We believe that lower prices is the ultimate cure to the oversupply disease.
Prices might seem low, but this oversupply condition might need even lower prices to cut enough production needed to balance the unbalanced market that the weak Chinese demand has left.