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October 3, 2022

Slowing Growth - Flexport Weekly Economic Report

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Phil Levy

Chief Economist, Flexport

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The latest installment of perhaps the world’s premier economic forecast told a tale of slowing growth in GDP and trade volumes plus rising prices. And both its risk analysis and its forecasting track record suggest things may be even worse than the grim forecast suggests.

In Focus - GDP Downgrades

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If you’re a professional economist and are asked how things look for the world economy in the next year or two, it does not suffice just to shake your head grimly and make an unhappy noise. You’re supposed to quantify.

The International Monetary Fund just did both. This past week, in its latest quarterly World Economic Outlook, it predicted that global growth in 2023 would be the weakest since 2001 (excepting the global financial and COVID crises). It forecast that world output growth would slow from 3.2% in 2022 to 2.7% in 2023. Relative to the IMF’s April expectations, that marked a downgrade for 143 economies accounting for 92% of world GDP.

The chart above shows the downward trend from last year to next in the IMF forecast, with both the US and the Euro Area seeing slowing growth. While the annual forecast number remains positive, that still allows for consecutive quarters of negative growth – something the IMF foresees for 31 of the 72 economies for which it does quarterly forecasts during 2022-2023. For the Euro Area’s largest economy, Germany, the IMF is forecasting -0.3% growth across the whole of 2023.

While China’s growth looks better than that of major Western economies, the 3.2% growth forecast for 2022 would be the slowest in more than four decades (excluding the Covid shock in 2020). The Emerging economies forecast in the chart includes China. India’s growth in 2022 (6.8%) and 2023 (6.1%) is expected to be stronger, while Russia’s economy is expected to shrink in both years (-3.4% and -2.3%).

One of the most striking features of the report is the extent to which the IMF has had to revise past projections. For GDP growth, those revisions have generally been large and negative, both compared to the July and April versions of its Outlook. Relative to April, world GDP growth was revised down by 0.4% in 2022 and 0.9% in 2023. Those are massive revisions for such a short time period.

The revisions have gone in the other direction on prices. The IMF acknowledges that it has consistently underestimated the persistence of inflation. It now forecasts that global consumer price inflation will go from 4.7% in 2021, to 8.8% in 2022, to 6.5% in 2023, and then 4.1% in 2024. It predicts the global inflation peak in the third quarter of 2022.

For the volume of world trade in goods and services, following rebound growth of 10.1% in 2021, the IMF forecasts 4.3% growth in 2022 and 2.5% in 2023.

As if these forecast downgrades were not enough, the report notes that risks are distinctly to the downside. Among the key ones that it identifies are errors in monetary policy, persistent inflation, debt crises in emerging economies, concerns about the Chinese real estate sector, and further health crises.

So the quantitative story is one of dramatically slowing output and trade growth and rising prices. The grim head-shake and unhappy noises are self-explanatory.

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Latest Flexport Metrics & Research

The Flexport Ocean Timeliness Indicator for Transpacific Eastbound (TPEB) routes was unchanged at 82 days, retaining its lowest point since May 2021. Flexport’s Air Timeliness Indicator meanwhile was unchanged at 9.5 days.

Recent Flexport research includes updates to our key indicators, as well as an investigation of why ocean shipping times to Europe and North America have diverged.

The latest update to our Post-Covid Indicator shows overall preferences for goods over services are expected to decline to below summer 2020 levels into late Q4’22.

Our Trade Activity Forecast calls for imports to increase sequentially on a real (i.e. inflation adjusted), balance of payments, seasonally adjusted basis by 1.2% in September after dipping in August.

Economics Data

U.S. Consumer Price Inflation (CPI) was 8.2% in September on an annual headline basis. That was the same level as August and was higher than economists expected. Perhaps more important, core CPI – excluding food and energy – rose by 6.6%. That was up from 6.3% a month earlier and set a 40-year high. Shelter costs increased to 6.6% from 6.3%. As discussed in prior research, shelter’s an important signal of the stickiness of inflation.

  • U.S. Producer Price Inflation for final demand dipped to 8.5% in September, from 8.7% in August and a peak of 11.7% in June. That was also faster than economists expected.
  • U.S. import prices fell by 0.5% sequentially excluding food and fuels in September. That slowed the annual rate to 3.3%, the slowest since February 2021.

U.S. retail sales were unchanged in nominal terms in September vs. August. Among durable goods, sales of autos fell by 0.4%, while sales by furniture and electrical goods stores declined by 0.7% and 0.8% respectively. For nondurables, sales of gasoline fell by food and clothing improved.

  • Consumer sentiment regarding current economic conditions improved in the University of Michigan’s October survey, to 65.3 from 59.7 (10 year average is 96). That marked the highest since April. However, expectations above future conditions fell to 56.2 from 58 (10 year average is 76), after holding steady for two months.

U.K. merchandise trade activity increased 42% year over year in August, including a 37% rise in imports and a 49% surge in exports. The figures are flattered by inflation. Imports on a real basis were still 15% higher than a year earlier and 10% above the same period of 2019.

  • EU merchandise trade activity in August was also flattered by inflation. Nominal imports from outside the EU climbed 56.4% year over year, which dropped to 21.5% on a real (inflation adjusted) basis. Nominal exports increased by 24.2%, including a 41.3% drop in shipments to Russia.

Policies & Regulations

The U.S. Trade Representative has published a call for comments on the Section 301 duties applied to imports from China. That’s part of a broader review. The comment period runs to January 17, 2023, suggesting a final action on the tariffs is still several months away.

The New Zealand government has launched a dispute against Canadian dairy tariff-rate quotas under CPTPP trade agreement rules. The move is notable in being the first launched under that deal’s regulations. It also comes against the backdrop of a similar move by the U.S. against Canada under USMCA rules.

The German government has also introduced major new natural gas subsidies worth around 96 billion euros. That will be delivered in the form of a one-off payment to cover consumers’ December energy bill. A wider plan across the EU to cap natural gas prices for use in power generation is making slow progress.

  • The U.K. government meanwhile has expanded its energy price subsidy scheme to cover contracts signed since December 2021, rather than April 2022. The total cost of support for households and companies is estimated to be worth 150 billion pounds ($168 billion).
  • The Japanese government has put a new natural gas sourcing framework in place. That will allow a state-owned firm to buy natural gas in the event pricing / profitability is unattractive for private firms. The enabling law also includes the ability to force large firms to cut their usage when supplies run low.
  • A new natural gas interconnector between France and Germany has started operations. That should allow Germany to access liquefied natural gas import terminals in France, further reducing its reliance on Russia.

Supply Chain Update

Global PC shipments fell by 15% year over year in Q3’22 according to data from IDC. Among the major manufacturers only Apple, which produces its own processors, managed to expand with 40% growth. That’s already led two major chipmakers to cut costs by slashing headcount and reducing capital expenditures.

Supply chains continue to be beset by strikes. A new strike at the Port of Liverpool started last and comes amidst discussions of redundancies by the port operator.

  • A strike by workers at Transnet in South Africa is holding up the shipping of basic minerals, including iron ore, coal and chrome. The action includes both port and railway workers.
  • Labor action at French petrochemical refineries has been extended, though the government has reportedly exercised emergency powers to force some workers back to work. Strikes are also being threatened by unions at nuclear power plants.
  • The U.S. rail industry is not out of the woods – despite an agreement being reached recently between companies and workers – after one of the unions involved failed to ratify the deal. Some clarity should emerge once all the votes are completed by November 20.

Aluminum prices climbed 7% after reports of a U.S. plan to apply punitive tariffs to all aluminum exports from Russia. That follows a new round of sanctions launched two weeks ago, as well as plans by the London Metal Exchange last week to ban trade of Russian metals from its systems.

  • The Russian government has banned EU haulage carriers from entering the country, in retaliation for the new round of EU sanctions. The volume of EU exports to Russia fell by 25% year over year in July and by 41% from its peak in December 2021.

The National Retail Federation has indicated that U.S. seaborne imports of retail goods in September likely fell by 3% year over year. They expect the decline to accelerate to 9.5% in October. Flexport’s Logistics Pressure Matrix includes S&P Global data, which indicates that total containerized imports in September likely fell by as much as 8% year over year.

U.S. logistics payrolls dipped by 0.1% sequentially in September versus August, including air, rail, water, trucking, couriers, warehousing and support. That was the first decline since April 2020 and included a lower number of trucking and courier jobs.

Chart of the Week - New Chip Restrictions

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The U.S. government has launched new restrictions on the export of semiconductors to China. The rules cover AI and supercomputing devices that may have military dual uses. They also include exports of equipment that can be used to manufacture those devices too.

The interconnected nature of semiconductor supply chains means that companies outside the U.S., including South Korea and Taiwan, also effectively face the restrictions. That’s already led a wide range of semiconductor and chip-making equipment companies to detail plans to restrict or end their operations in China. At least three firms have gained exemptions, but only for 12 months.

China accounted for 28% of U.S. exports of semiconductors (HS 8542) in the 12 months to August 30, 2022. There are already signs of a downturn in shipments. The chart above shows shipments fell by 39% year over year in the three months to August 31. Similarly, China represented 23% of U.S. exports of semiconductor manufacturing equipment (HS 8486) in the past 12 months, while shipments fell by 30% in the past three months.

It’s worth noting, however, that shipments of both chips and machinery to China from the U.S. remain well above the levels of 2017, before the Trump administration’s trade war with China began.

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.

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