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Global Trade Balances in the Slowing Economy

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Yesterday’s disappointing US ISM Services survey left markets worried about growth, playing into the main theme of the week. Several major countries will release their trade statistics for last month, and the consensus among analysts is that they will collectively show trade slowing down. International commerce is a leading indicator for global economic health, and is particularly relevant with the focus on the two largest economies.

The US has been expected to slip into recession later this year, with debate over just how bad it will be. On the other hand, China had been expected to show substantial growth this year after coming out of covid lockdowns. But that growth hasn’t manifested, and the forecasts for trade data suggests that the Chinese economy is weakening. High inflation around the world is seen hurting consumer demand, while the higher interest rates to combat the growing prices is seen hurting industrial expansion. Unless there is a surprise to the upside in the data over the coming days, the pessimistic narrative from the start of the week could be affirmed.

Wednesday is the big day

The middle of the week sees the release of both China and US trade balances. The former is expected to see a growing surplus, while the latter a larger deficit. Under normal circumstances, that wouldn’t be surprising or concerning. The issue is the directionality of the components, which imply less economic activity.

China’s trade surplus is expected to expand to $91.0B from $90.2B reported in April. This expansion, however, is seen as the result of imports falling faster than exports. Demand for Chinese goods is expected to slow to a growth of just 1.0% compared to 8.5% prior. Chinese demand for goods is projected to fall -5.0% compared to -7.9% reported in April.

The other side of the trade

Across the Pacific, the US’ trade deficit is expected to expand to -$78.2B from -$64.2B, driven by an expansion in imports and a drop in exports. The US is expected to have imported $325.2B in products compared to $320.4B in April, but demand for US goods is expected to have declined to $247.0B from $256.2B prior.

Australia will report its trade balance on Thursday, where the surplus is expected to drop to $12.4B from $15.3B previously, due to slowing exports. While export volumes to China of raw materials are seen maintaining, the drop in the price of commodities is seen reducing the value of exports. In the end, the dollar value is what influences the currency.

Trade outlook and the economy

There are some specific bright spots, such as Australia recently announcing it was close to resolving all pending trade issues with China. But the overall trend suggests a slowing of the total amount of trade, which implies generalized weakness in demand. Going into the summer, which typically sees expanded trade activity, this could leave the markets more worried.

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