Daily Economic Briefing: April 13, 2010

Daily Economic Briefing: April 13, 2010

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• The US trade deficit widened to $39.7 billion in February from $37.0 billion in January. Exports in February increased a modest 0.2%, restrained by declines in the volatile aircraft category as well as in agricultural exports which were held down by weaker prices. Imports rose 1.7%, partly accounted for by an increase in the nominal value of petroleum imports, but also supported by increases in various other goods. The real deficit in goods widened from $40.9 billion in January to $42.5 billion in February; foreign trade now looks to be a drag of about 0.4% point on first quarter GDP growth, which is somewhat less than we expected and thus lends some upside risk to our 2.5% 1Q projection.
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• Stepping back, the real goods deficit appears to have bottomed last June at just under $36bn, and has been trending higher ever since. Before that, the deficit had fallen by almost one-half from the mid-2000s to the mid-2009 bottom. The recent widening in the real deficit reflects the rebound in US import volume, which is being spurred by the recovery in domestic demand, including the stabilization of business inventories. Over the balance of this year, the US forecast envisions modest positive contributions from real net trade (including services), which would be an impressive accomplishment now that US demand is growing solidly once again.
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• Whereas the rise in global commodity prices is hurting the US terms of trade and boosting its deficit, the opposite pattern is playing out in Canada. Today’s February report showed that the nominal trade balance has climbed back into modest surplus. Indeed, Canadian exports not only are benefitting from this price effect, but also from stronger volume gains to the US, which remains its main trading partner.
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• Central banks in Turkey and India, two countries where a surge in food prices has lifted headline inflation to near 10%oya, are taking very different policy approaches. In Turkey, core inflation remains low amid a very large output gap, making the central bank reluctant to hike rates despite the risk of a rise in inflation expectations. Today the CBRT again left rates on hold at a record low 6.5%, while saying that it would unveil more detailed plans for a gradual exit strategy tomorrow. By contrast, both headline and core inflation are climbing in India, where we estimate that the output gap is closed. Amid a generally reluctant EM central bank universe, the RBI was one of the first central banks to begin normalizing its policy stance. In a note to clients today, our colleague Jahangir Aziz argues that this process will continue at next week’s policy meeting, when he looks for the RBI to raise policy interest rates 50bp to 5.50%, along with a 50-75bp hike in the cash reserve ratio.

China’s March merchandise trade deficit—the first since 2004—made headlines this week. China had been running a trade surplus of as much as $30-40bn per month at the end of 2008. But following the peak around the turn of 2009, the trade position deteriorated swiftly as the global recession took hold. This experience was typical of most “surplus” countries, including Japan and Germany, which also saw their trade surpluses erode during the downturn in the global economy. As noted on page 1, the opposite effect happened in countries such as the United States, which saw its deficit narrow sharply.
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However, breaking from the broader trend, China’s headline merchandise trade surplus languished during the early phase of the global recovery, whereas trade balances have rebounded more substantially in Japan and Germany. To be sure, the swing into deficit in March is a temporary phenomenon related to the Lunar New Year holidays. However, the surprising plateau in the balance prior to March reflects blistering imports growth which has outpaced a strong bounceback in exports.

At the root of this development is a large swing in China’s terms of trade. While export prices have been about flat on net over the latest 6 months (through February), import prices have risen 15% over the same period, thanks to commodities.

As such, our estimates of China’s trade volumes—which only extend through February—tell a very different story than the headline values that is more in line with other trade surplus countries. After hitting bottom in early 2009, the volume trade surplus has been back on the rise. In fact, China’s February real goods balance is just 4% below its average 2008 level.

To be sure, the adverse swing in China’s terms of trade and the sustained erosion in the nominal balance is important. It is squeezing profit margins and could be inflationary (moredomestically than globally), which is one reason why some are advocating a stronger currency. But it is masking the dramatic improvement that is occuring in the real trade position, which has the most bearing on the growth of production and employment.

ENDS

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