The Netherlands Bureau for Economic Policy Analysis (CBP) has just released the world industrial production index and the world trade data for June. This gives a good perception of the economic momentum during the second quarter.
I’ve already used this data (see here) and this is an update and a way to understand the current economic situation.
In June the world industrial production index was at the same level than in May. It was up by 2.4% comparing the second quarter to the first at annual rate. Compared to the 2nd quarter of 2012 the index was up by 1.9%.
For developed countries the index was down by -0.1% in June (on a month), up by 2.6% for the whole quarter but its level was unchanged when compared to the 2nd quarter of last year.
For emerging countries its specific index was up by 0.1% in June, up by 2.2% during the second quarter and up by 3.8% when compared to the second quarter of last year.
World trade (in volume) was down by -0.5% in June compared to May, up by 1.3% during the second quarter and up by 1.7% when compared to the second quarter of last year.(in the 5th chart the number is not the same as I then use a comparison between one month to the same month of the previous year).
In advanced countries trade is up by 1% in June, up for the second quarter by 4% but down by -0.4% when compared with the second quarter of last year. For emerging countries trade is down by -2.1% in June, down again during the second quarter (-1.3%) but is up by 4% on a year.
(all this figures has gathered in a table at the end of this post).
These data do not show a strong momentum. The world economy is not in a period of rapid and deep acceleration. That’s what we have to keep in mind.
Five remarks on the current situation
1 – The global momentum is still slow. We haven’t seen any acceleration during spring and the trend is still well below its pre-crisis level. This can be seen on the charts 1 and 5 below. There is no catch up that could let imagine that the gap to the pre-crisis trend can be reduced rapidly.
This low growth dynamics implies that we cannot expect a rapid improvement on the labor market in developed and in emerging countries.
The global picture can be understood as follows: after the recession and the boost given by governments in developed and emerging countries, each country now wants to reduce its own imbalances. This means that we are still in the period of long and deep adjustment. Most of these resources are used to improve the domestic situation. This cannot be considered as a trigger for a more dynamic situation in the short-term. There is still a need for adjustment and for a stronger internal dynamics to expect a global and strong recovery. It’s still too early.
2- Recent improvements seen in Europe are not totally recorded in these data yet. But we can see on chart 3 that the Euro Area is no more a drag for the world economy. That’s a real change compared to what was seen at the beginning of the year. It is not yet a catalyst but it is not a drag anymore. That’s progress.
Nevertheless developed countries do not have a strong leadership. We see in chart 2 that the production index is just on a +0.4% trend. A catch up to the momentum seen before the crisis cannot be spontaneously imagined and the gap with the pre-crisis trend will remain wide; a convergence to the pre-crisis trend cannot be expect. This means that the costs of the crisis will be large and persistent.
3 – We start seeing that emerging countries are on a lower trend than in a recent past.
We can understand this new trend in two ways: Europe and the USA are their main clients. But for the last 2 years Europe was almost in recession and the USA had lower growth than in the past. Their demand to emerging countries was lower and this was a drag to their activity.
Moreover China is not playing the same role anymore. By rebalancing its growth process this changes its resources allocation. More attention is now given to internal issues in China and a lot of countries that became dependent on Chinese impetus in the past are not able to move to a more autonomous way.
In fact when looking at chart 5 we see that the World Trade growth has been too low for too long. World trade is no more an impulse for emerging countries that have to change the way they grow.
With that in mind and the change announced by Ben Bernanke on the US monetary policy stance, all the ingredients are gathered to understand the current emerging crisis.
4 – On each chart there is a break at the beginning of 2011. This reflects the fact that all the measures put in place after the recession were exhausted in developed and in emerging countries. At the same time developed countries trying to reduce their own imbalances were not able to have the leadership they had in the past to foster the recovery.
No region was able to lead the recovery: the USA and Europe for internal reasons, China because it wanted to rebalance its growth and no emerging countries because their internal demand couldn’t give them a sufficient autonomy.
5 – At the end of June economic activity was on a mild mood. July surveys and the first surveys we have in August show that in industrialized countries the situation is getting better. This is positive for Europe and the United States. But surveys in emerging countries are weak moving in the opposite direction.
At the end this could reinforce leadership in advanced countries and change the balance of strength with emerging countries. May be are we at a deep change?
Chart 1 – World Industrial Production Index (100 in 2005)
We see a weak trend since 2011. It’s growth rate is only 2.4% and has to be compared to the pre-crisis trend which was 4.4% (2 points higher).
This has a negative impact on commodity prices but also on employment. This trend cannot be considered as satisfactory as it is associated with weak employment in developed and emerging countries. That’s a strong risk of instability.
Chart 2 – Industrial Production by regions
The chart below discriminates between developed and emerging indices. We see that everywhere there is a break in 2011 and that current trends are slower than what was seen during the pre-crisis period even in the emerging.
In developed countries the trend since 2011 is 0.4% to be compared to the 2.3% growth seen before 2008. Looking at the blue line that characterizes the developed countries in the chart we cannot be persuaded that the crisis is over.
For the emerging’s the current trend is 4.6 % (since 2011) and is almost half of what it was before 2008 (8%). This low trend with population still growing will not be easy to manage and if this slow momentum continues for a while there will some social instability.
Chart 3 – Industrial Production: Contributions to its annual growth
On the chart I’ve put contributions from Asia, the USA, Japan and the Euro Area.
Instantaneously we see that the Euro Area and Japan have still a negative contribution at the end of the second quarter. It is less than what was seen in 2012 but these regions are not yet supportive to global growth. It’s no more a drag but not yet a support.
In the legend there is the long-term contribution (average on 1992-2007) for a region or a country and its contribution in June.
We see that none of the four countries or regions is above its long-term average. There is no leadership, no catalyst that could drive global growth on a higher trend.
We see that Asia has currently a lower contribution that it had from 2003 to 2008. At this moment this latter was strong and stable under the impulse of China. This is no longer the case.
The US contribution is still weak compared to its long-term average.
Chart 4 – More detailed contributions
I have added Central Europe, Latin America and Africa and Middle East on the chart but this does not really change the picture. Currently contributions from Eastern and Central Europe and from Latin America are close to 0 and Africa and Middle East is not pushing activity on the upside.
Chart 5 – Annual Change in World Trade (in volume)
Since mid-2011 world trade change is below the blue band on the chart. This blue band is the 1992/2007 average +/- a standard deviation.
We have with this chart a measure of the weak dynamics of trade. This is not due to protectionism but to the fact that resources are used to improve and reduce internal imbalances almost everywhere.
Chart 6 – World Trade: Contributions to its annual change
The picture is not very different from what was seen for the industrial production index.
The same reading can be done from the legend and we see that none of these four regions or countries has a contribution higher than its long-term average. As for the production this clearly reflects the absence of leader that could drive activity higher.