In the pre-crisis days of 2007, globalization was often measured by stock markets and international trade. In October 2007, the Dow Jones Industrial Average (DJIA) closed at a record high of 14,165. While optimists saw it as a sign of the new “flat world,” it was not matched until March 2013.
More recently, the DJIA closed above 17,000 – 20 percent higher than in October 2007. But does international trade show similar gains?
The Baltic Dry Index (BDI) – a rough shorthand of commodity-driven international trade – peaked at 11,793 in May 2008. If markets truly reflect real economies, one would expect the BDI to hover above 14,100 today. Yet, the cold reality is that the benchmark is closer to 810.
The disconnect illustrates a massive gap between market expectations and real economy performance.
Subdued export-led growth
When the global financial crisis swept the markets in fall 2008, export-led growth plunged.
The subsequent destruction of value spared neither cost-efficient Chinese manufacturing exporters in Guangdong and Indian IT outsourcing service giants in Bangalore, nor Germany’s Mittelstand export engines or Japan’s mighty electronics giants.
As half a decade has passed from those days of bitter wine and dead roses, growth is strengthening in the United States, Europe is on a slow road to recovery and Shinzo Abe’s Japan has opted for a liquidity-driven gamble.
In advanced economies, export-led growth has prevailed, even if it is a lot weaker than half a decade ago.
Last year, none of the core European economies were among the fastest growing European exporters. The latter comprised struggling small countries in Southern and Eastern Europe.
In Germany, growth is expected to remain relatively solid in the next year or two, thanks to strong domestic confidence. Setting aside downside scenarios, exporters are likely to benefit from the gradual bottoming out of Europe’s recession and the slow strengthening world economy. In 2014-15, growth could amount to about two percent.
At the same time, French growth will remain less than one percent. With contracting investment, export competitiveness is threatened. Paris is hoping more easing at the European Central Bank (ECB) to cause euro depreciation, which would boost French firms’ export competitiveness.
In the absence of surprises, the UK will grow faster than even Germany in 2014-15. In turn, British exporters are leaning on America’s lingering growth and Europe’s lingering recovery. However, the stronger-than-expected pound continues to constrain exports, which will be compounded by the expected policy-rate normalization in 2015.
After Premier Matteo Renzi’s impressive election victory, Rome is pushing for more growth and less austerity at Brussels, while struggling to deliver at home.
After the contractions of 2012-13, growth will remain 0-1 percent in the next two years. Strong euro is penalizing Italian exports, which has suffered from lagging competitiveness and continued de-industrialization.
Indeed, the current ratio of the euro to the US dollar reflects extraordinarily poorly the relationship between the real economies. The latter, in turn, will prolong the stagnation in Europe while constraining export success in the Eurozone.
Toward emerging economies
Last year, China and Germany, the world’s two leading exporters, had a bilateral trade volume of €140.4 billion. China was Germany’s number three trade partner, ahead of the US.
In early July, Chancellor Merkel brought to Beijing a huge business delegation to oversee the signing of contracts, including one with aircraft manufacturer EADS for 100 helicopters, worth €300 million.
Despite its extraordinary resilience in exports, Germany has few alternatives. Between 2015 and 2020, even its growth will decelerate from two percent to 1.3 percent.
After half a decade of contraction and stagnation, even the most resilient European exporters must cope with rising internal risks in Europe, particularly with aging populations, slower growth and productivity.
Neither Europe nor the US or Japan have great long-term growth potential, but emerging powers do.
In the past few years, Brussels – first reluctantly and now more willingly – has moved to deepen economic relationships with China, Brazil, India, Russia, and South Africa.
Collectively, the five saw their share of world GDP rise from 15 to 26 percent between 1995 and 2012. It will exceed 30 percent by 2018. In trade their share has more than doubled from some 10 percent of world exports in 1995 to over 20 percent today.
In brief, the exports of the BRICS expanded more than six-fold between 2000 and 2012 but only three-fold for the world as a whole. According to the WTO projections, emerging economies are likely to outpace advanced countries in terms of both export and GDP growth by a factor of two to three, in the future decades.
Today, too many European countries and companies that continue to have great export potential continue to trade with nations that enjoyed growth spurts three to four decades ago. It is time to augment existing trade partners with those in emerging economies.
Time is running out.