Supported by solid import demand in China and Asia, worldwide stimulus measures, and a mild consumption recovery in some countries (notably Germany and Japan), global exports are rising again from very low levels. However, as the effects of government stimulus programs wear off, questions about sustained growth in final consumer demand, especially in the United States, still threaten the recovery.

Although world trade is still approximately 20 percent below last year, the embryonic trade recovery helps explain the improvement in industrial production indicators of recent months, as well as favorable surprises in second quarter growth in Germany, France, several countries in Asia, and smaller diversified exporters such as Israel, who reported second quarter national income accounts over the weekend.

Furthermore, recent reports suggest that the production improvement through the second quarter occurred despite continued large scale destocking, boding well for the output recovery being sustained in coming months.

However, recent data also confirms that the recovery in final private demand remains tentative, especially in the United States, the country at the epicenter of the financial crisis. As questions about the sustainability of the recovery persist, central banks and finance ministries remain appropriately cautious and their policy stance remains strongly supportive. Financial markets have been volatile, reflecting concern that the historic global stock market rally will not be adequately supported by fundamentals.

Production Improves; Financial Markets are Volatile

• Both major and smaller economies registered growth in the second quarter, boosting hopes of global recovery. Germany and France posted an annualized 1.2 percent GDP growth in the second quarter, while the Euro Area contracted by a better-than-forecasted annualized 0.4 percent. Over the same quarter, Japan’s GDP rose an annualized 3.7 percent and Israel’s GDP rose an annualized 1.0 percent, U.S. Industrial Production (IP) increased for the first time in nine months, by 0.5 percent (m/m) in July. Euro Area IP, however, unexpectedly declined by 4.2 percent (m/m) in June, offsetting hopes for a quick recovery.
   
• Global equity markets fell sharply on disappointing demand developments and fears that equity prices in the past month had outpaced earnings. China’s Shanghai Composite Index fell 6.6 percent for the week, the steepest fall since February, while U.S. Dow Jones, German DAX and UK FTSE 100 all fell by between 0.4 and 2.8 percent. The Global Emerging Bond Market Index spread—which measures the premium investors pay on emerging market bonds over U.S treasuries—jumped 37 basis points from a week ago to 383 basis points on Friday.

Global Exports are Recovering from Low Levels

• Having started the year in precipitous decline, global trade stabilized over April, May, and appears to be growing again in June and July (see below). Global exports fell only 0.6 percent on a three-month seasonally adjusted, annualized measure in May. The same metric plunged 58 percent in February, 50 percent in March, and 29 percent in April.
   
• Exports, however, remain depressed compared to levels a year ago. For example, global exports in April were down a steep 26.7 percent from the same month in 2008; May exports were down 23 percent. Chinese exports were down 21 percent in June and 23 percent in July from a year ago, while Japan saw a 35.7 percent year-over-year decline in June. German exports were still down a hefty 22.3 percent in June and 24.6 percent in May; UK exports saw a 10.1 percent and 10.4 percent decline over the same months. U.S. exports in May and June were down 21.2 and 22.2 percent, respectively.
   
• The export recovery came first in Asia. Chinese exports jumped 7.5 percent in June and 10.5 percent in July (m/m). Japan’s monthly exports rose by 14.7 percent in June. Exports in Singapore and India rose by 3.7 percent and 0.7 percent in May, respectively. Comparing the three months before March with the three months prior to June at an annualized rate, China’s exports grew by 59.5 percent; Japan’s soared by 72 percent.
   
• Exports in Germany improved in recent months amid government spending programs and “cash for clunkers” programs. Following a modest 0.2 percent gain in May, German exports were up 7 percent in June, the most growth since September 2006. U.S. exports rose by almost 2 percent in June, after rising 1.6 percent in May.

Exports helped economies stabilize in the second quarter.

• In the second quarter, French exports grew by 1 percent and net exports added 0.9 percentage points to GDP. Second quarter exports fell in Germany, but by less than imports, resulting in trade changes having an overall positive effect on GDP. Japan’s exports jumped 6.3 percent in the same quarter, compared to the previous three months. Net Japanese exports contributed 1.6 percentage points to quarter-on-quarter growth.

Imports in Asia are growing but U.S. imports are still declining.

• Across Asia, aggressive fiscal and monetary stimulus helped revive domestic demand. Asian banks remained relatively isolated from the financial crisis, and Asian consumers are not nearly as overextended as consumers in the United States and UK. The pace of growth of imports, reflected by the June three-month annualized rate, skyrocketed to 131 percent in China, and climbed to 27.4 percent in Singapore and 20.7 percent in South Korea. Monthly import growth figures are also much stronger in Asia than elsewhere. China’s monthly imports rose 8.1 percent in May; June imports in Korea rose 13.4 percent; and Singapore saw a rise of 0.8 percent. Additionally, Japanese imports were up 9.9 percent.
   
• German imports were up 6.8 percent in June, after falling 1.9 percent in May
   
• U.S. imports are still declining as June imports fell 0.4 percent from April and 34.5 percent from a year ago.

Consumer Demand Remains Fragile

• U.S. retail sales, excluding autos, fell by 0.6 percent (m/m) in July, the biggest decline since March. The Reuters/University of Michigan Index of Consumer Sentiment fell from 66 in July to 63.2 in August, the lowest level since March and one of the lowest on record. Initial jobless claims rose from 554,000 a week ago to 558,000. The housing market, though improving, remains weak, with foreclosures increasing 6.7 percent (m/m) to a record high of 360,149 in July.
   
• In the UK, same-store retail sales rose by 1.8 percent, while total sales were up by 3.6 percent in July from a year earlier. Japan’s service demand rose 0.1 percent (m/m) in June, buoyed by stimulus programs.

Economic Policy: Cautious and Supportive

Uncertain about the durability of the incipient recovery, policy makers were eager to signal that their stance would remain supportive. 

• The U.S. Federal Reserve extended the expiration deadline for its bond purchasing program by one month, until the end of January 2010, and guaranteed interest rates would remain low for an “extended period.” The Fed also extended a program designed to improve credit markets by six months, through June 2010.
   
• Despite Japan’s 3.7 percent annualized growth in the second quarter, credit conditions remain tight, prompting the Bank of Japan to announce it may extend its emergency credit program into 2010, and leaving the primary interest rate unchanged at 0.1 percent.
   
• China's central bank backpedaled on its statement that monetary adjustments were coming soon after dramatic decreases in bank lending this month. The Commerce Ministry also lowered trading fees to help boost imports and exports.

Looking ahead

To see how global trade is evolving, look for the release of Eurozone’s June current account index on Wednesday August 19 and for detailed national income account data on September 2.

This analysis was produced by the editorial staff of the International Economic Bulletin, including Shimelse Ali, Bennett Stancil, Mihir Narain, and Uri Dadush.