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June 12, 2023

Don’t Panic - Flexport Weekly Economic Report

Don’t Panic - Flexport Weekly Economic Report

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Phil Levy

Chief Economist, Flexport

June 12, 2023

The World Bank’s latest assessment of global economic prospects is not projecting anything like the economic plunges of 2020. But it sees slow growth and mounting challenges that are particularly concerning for the developing world.

Next week's Weekly Economic Report will be released on Tuesday 6/20 due to the Federal Holiday on Monday 6/19.

In Focus - Global Crystal Ball

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The World Bank just released its semi-annual Global Economic Prospects report, which includes fine-grained analysis of economic developments. In particular, it provides detailed GDP forecasts out through 2025. As Douglas Adams’ fictional universe showed decades ago, however, a number alone – or numbers, this case – can be unsatisfactory, whether from a galaxy-spanning supercomputer or a globe-spanning team of economists.

The overall tone of the forecast is somewhere between cautious and grim. The current estimate is that the global economy grew by 3.1% in 2022. It forecasts that we won’t re-attain that level until 2025. In the interim years, the report calls for pain deferred – it has upgraded 2023 global growth to 2.1% and downgraded 2024 to 2.4%. This pattern of upgrading 2023 and downgrading 2024 growth applied to all but a few major countries (Japan, Argentina, and South Africa all saw 2023 downward revisions).

The challenge with interpreting the growth estimates is picking the proper comparison. Should we consider the absolute level of growth? The level compared to expectations? Compared to other regions? Compared to prior-year growth?

The chart shows some of the growth paths. The first bar for each cluster is 2022, which is still labeled as an estimate because some countries have not reported final data. Beyond, there are estimates for the ensuing three years.

Look at Japan and Latin America & the Caribbean. At first blush, Latin America seems to be doing better across the board. From this year, its growth is accelerating rather than decelerating, as in Japan. For each year, the region is growing faster than Japan. So what’s not to like?

Emerging and developing economics (EMDEs), by definition, have lower GDP per capita than advanced economies like Japan. They also frequently have faster population growth. Thus, if they are to catch up on a per capita basis, they need to grow faster than their advanced counterparts. And those hopes have faded.

The World Bank expects that, excluding China, growth in EMDEs (including Latin America) is set to slow to 2.9% this year. By 2024, EMDE GDP is expected to be roughly 5% below pre-pandemic projections. “Excluding China,” the report concludes, “EMDEs are expected to continue making next to no progress at closing the differential in per capita incomes relative to advanced economies.”

The risks the Bank cites are familiar, plentiful, and tilted to the downside: persistent core inflation, central bank rate increases, banking stress leading to credit crunches, and trade dampened by weak demand and increased protectionist measures.

With its focus on the global picture and on EMDEs, the Bank highlights two issues which are mentioned here less frequently. The first is the potential for debt crises in the developing world (note the plural). When interest rates rise, the cost of maintaining any given level of debt goes up. The report concludes that “the rising cost of servicing debt is increasing the risk of debt distress among EMDEs, particularly (low-income countries).”
The second is the possibility for spillovers, where one country’s economic experience can have a significant effect on other economies. This can come through rate hikes, banking stress, debt crises, or simply a falloff in demand for imports.

There is no fail-safe guide to navigating such challenges. If there were, though, it might well begin “Don’t Panic.”

Latest Flexport Metrics & Research

Last week, we published a piece tracking supply chain recovery since the pandemic.

Economic Developments

Euro area Q1 GDP shrank by 0.1% quarter-on-quarter on a seasonally-adjusted basis, marking the second straight quarter of contraction, following a 0.1% decline in Q4 2022 and putting the region in a technical recession. Household consumption declined by 0.3% and net exports were -0.1%. GDP was up 1.0% year-on-year, however, and was 2.2% larger than Q4 2019, the quarter before the start of the pandemic.

Euro area retail sales were flat in April compared to March, when they were down 0.4%. Calendar-adjusted sales were 2.6% lower than April 2022. Non-food products were up 0.5% but a 2.3% decline in fuel pulled down the overall results.

Consumer credit in the U.S. grew at an annualized rate of 5.7% in April, bringing the total amount of credit outstanding to $4.9 trillion. The volume of revolving credit, which includes credit card balances, expanded by 13.1% after increasing by 14.6% in March, ending the month at $1.2 trillion.

While U.S. wholesale inventories decreased 0.1% month-on-month in April they remained 6.3% above the revised April 2022 levels. Durable goods inventories rose by 0.6% from the revised March figures, led by machinery and other equipment, which were up 0.3% and 26.7% from last year. Inventories of non-durables shrank 1.2% from March, within which apparel stocks were down 2.3%.

U.S. initial jobless claims came in at a seasonally-adjusted 261,000 last week, the highest number since the last week of October, 2021, a sign to some that the labor market is starting to loosen. We are so far unconvinced.

Japan’s GDP increased by 2.7% at an annualized rate in the first quarter, 1.1 percentage points above the preliminary estimate. The upward revision reflects rises in private consumption, business investment and government spending. Net exports were down 4.2%, however.

Last week’s major trade data releases were again mixed, with U.S. imports helping to power overall trade in North America, while China’s April and Taiwan’s May exports saw unexpected dips.

U.S. real goods imports were up 2.4% month-on-month to $232.6 billion but were down 2.1% over last year. Year-to-date, imports are 2.8% lower than the same period in 2022; automotive imports are up 11.0% by that, while imports across the other five main end-use categories are down. Meanwhile, imports from the Euro area, and Canada and Mexico combined, were up 8.9% and 2.2%, respectively. U.S. real goods exports decreased by 5.6% to $136.7 billion in the month, but remained up by the same 5.6% year-to-date.

China’s April exports fell 6.4% in April from March and were only 2.5% above 2022 through the first four months of the year despite the country’s lifting of pandemic-era measures. Over the same period, exports to the U.S. declined 14.3% and exports to the EU by 4.3%, while exports to ASEAN increased 15.0%. Overall exports in the “Hi-tech products” category are down 13.4% and within the category, shipments of chips by 15.2%.

The number of Mexico’s light vehicle exports jumped 14.2% year-on-year in May, following a 5.0% increase in April. It was also the highest volume since February and the sixth consecutive month exports increased.

Taiwan’s May exports were down 14.1% from last year, with shipments of electronic parts 9.9% lower and machinery 12.4%. Exports of ICT equipment, which includes semiconductors, increased 11.9% but year-to-date remain 3.7% below 2022. Overall exports to the EU rose 5.1% on the month, though they dropped by 4.1% to North America and 16.0% to Asia.

Canada’s exports recovered in April after two straight months of declines, rising by 2.8% in real terms on the strength of commodities sales, although shipments of motor vehicles and parts increased 7.4% month-on-month and 16.2% year-on-year, which Statistics Canada attributed to improvements in supply chain bottlenecks (see our recent commentary on the topic here).

Political Developments

The U.S. Chamber of Commerce urged President Biden to appoint a mediator to settle the ongoing dispute between The International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Union (PMA), which has resulted in disruptions to operations at major ports on the West Coast. As of last Friday, it was estimated that $5.2 billion worth of cargo was stranded offshore at the ports of Los Angeles, Long Beach, and Oakland. Negotiations between the ILWU and PMA have been ongoing since May 2022.

Last week President Biden and UK Prime Minister Rishi Sunak announced The Atlantic Declaration: A Framework for a 21st Century U.S.-UK Economic Partnership, which will address five pillars and include supply chains and an agreement on critical minerals of the kind the U.S. has recently completed with Japan and is currently negotiating with the EU. As with the other critical minerals deals, the UK would be granted FTA-like status, allowing its automotive sector to receive tax credits for EVs provided by the Inflation Reduction Act.

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.

About the Author

phil levy headshot
Phil Levy

Chief Economist, Flexport

June 12, 2023

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