Geopolitical & Security

Posted in: Geopolitical & Security, Stress & Threats, Economics
Trade flows' collapse continues - A Profound Threat to the World Economy
By AMP
Jul 15, 2009 - 4:30:27 PM

The OCED, in a report issued on the 15th July, states that, “The unprecedented and largely synchronized drop in merchandise trade volumes of the Group of Seven (G7) countries of the last quarter 2008 continued in the first quarter 2009. When compared year-on-year, the steep rate of decline already observed for Q4 2008 reached two-digit levels in Q1 2009 for almost all countries.”

The figures were bad both on an annual basis and in comparison to the previous quarter. On a quarterly basis G7 exports fell by 13.6% while imports were down 10.5% in the first quarter of 2009. On an annual comparison 2009-2008, G7 exports dropped by 22.8% and imports fell 16.8% in the first quarter 2009. Some countries were more affected than others, Japan experienced a 26.7% slump in quarter-to-quarter exports, and a drop in imports of 12.9%.

On a year-on-year basis, the value of exports and imports of goods and services plunged, by 27.1% for exports and by 27.9% for imports in the first quarter. The sharp drop observed in Q4 2008 continued in Q1 2009, albeit less steeply. The OECD also noted that, both on an annual and a quarterly basis, the trade in goods fell at about twice the rate for those of services. Although the OECD saw signs of the steep drop in trade easing at the end of the first quarter for some countries, the general trend remains downwards.

It’s important to grasp that in the space of a year nearly a third of world trade has vanished. The impact on the shipping industry is going to be profound, and this at a time when a thousand new ships will enter the market in 2009 and another thousand in 2010. It is clear that the global depression is not yet over and that things are still getting worse.

It is also difficult to put into words how radical this change in the global economy is, true these figures do not include the imports and exports of states like China and India, but the United States and the European Union are the largest markets in the world, China, like Japan before it, has concentrated on building production for the export market, and despite China's $2 trillion of reserves (Bloomberg.com - 15 July 2009) it seems clear that it will be unable to convert all its export-focused industries into domestic producers.

We are seeing the destruction of value at a staggering rate, 2008 was the year when the brakes really hit globalization and the collapse in trade is now progressing faster than was seen in the Great Depression.  In the United States the annualized drop in non-oil goods imports was 60.5% in 2009Q1 (log terms), while that of non-agricultural goods exports was 51.5%, both in log terms. (http://www.econbrowser.com/archives/2009/06/update_on_us_ex.html).

At this time it is pointless to be too concerned with the causes of this collapse, it is convenient to say that depressed economic activity and diminished access to credit are the primary causes, but in my opinion these are the consequences of a global collapse in confidence, in the belief that the system will deliver profits and growth. We now have a tortoise economy, where everyone is afraid to invest and are now not even looking for credit, but are discounting their assets and looking to reduce their cash flow, primarily by reducing costs, including the costs of labour and inventory.

You can regard a functioning economy as a type of confidence scheme, as long as everyone believes that the price of assets, like houses and pensions, will continue to grow all is well, but once contraction is introduced into the system, confidence rapidly erodes and trade flows plummet, as happened in 2008. But, in 2009, there is no sign that this process is finished, nor any sign as to when it is likely to finish. Look at the numbers above, then you know that you must ignore any politician, or business leader, who talks of the green shoots of recovery. They should, at this stage of the cycle, be taken to an institution suitably equipped to deal with the insane.  If the flow of goods and services has dropped in one year by nearly a third for the G7 countries, we must expect that by the end of 2009 the total drop may approach half the 2007 figures - and the US numbers cited above give creditability to such a prediction - this represents a massive destruction of asset value around the world.  The enormous investment in manufacturing plants can be discounted by half, true we have been buying iPhones by the million, but not a new car for the family, the old one will easily last twenty years, and, as Cuba has shown, cars can be kept on the road virtually indefinitely. We are cutting back on long-haul holidays, not moving house (because our mortgage is too close to turning negative) and looking at the immediate prospect of losing our job.

Watch the unemployment figures around the world, we are going to explore territory very soon that has not been seen since the 1930s. Governments (apart from China) lack the money to make too many "create work" schemes, so the prospect of new highways and relaid railway tracks (which makes more sense than roads in the era of climate change) is going to recede like morning mist.

In short we are headed into nothing less than economic melt-down and no one has any idea what to do. We have to create our own solutions, to look after ourselves, because our governments will soon lack the ability to help us. They will face a disastrous plunge in their revenues, and their options are closing as fast as everyone else's.

There will, of course, be a bottom to the collapse, there always is, but the world we now live in is already a dramatically different one from the world we inhabited only a few years ago, and the effects of the last eighteen months will take years to work their way though the system, and there will be no going back to the conditions at the start of the 21st century. We will have to work out a new solution.