Data released overnight from China showed that the global economy is unlikely to hit rosy growth targets projected by the International Monetary Fund. The reality on the ground is continues woes for exporters despite commodity deflation which should be propping up margins for exporters requiring raw materials as inputs. While margins might improve, if there is no one to buy output, the incremental gains from the price drops are meaningless. The recently recorded Chinese export slide underlines the reality on the ground as the global trade downturn deepens. Devaluation concerns are running rampant as export nations do what they can to maintain market share in key industries. Slowing exports and a concerning slump in imports to China show that the headache facing many emerging economies is not unfounded and continues to dominate the policy outlook. While emerging economies might have room to cut interest rates and devalue local currencies, the impacts of these dovish policies are temporary. Just ask the Bank of Japan for proof.
Competitive devaluation has generally proven a sound mechanism for protecting market-share and increasing competitiveness in the short-term, however, on a long-term basis it is no solution for export oriented woes. The key here is to stimulate end-user demand, something monetary policy is powerless to correct in this particular situation. No matter what global central banks choose to throw at the problem, the real driver of organic growth is grassroots business. Lending to this area in particular has been anemic since the “Great Recession” and has contributed in many ways to the structural deficiencies currently facing markets. As import demand dries up, countries will have to place renewed focus on fiscal reform as the limits of monetary policies are tested. Fiscal stimulus is the only mechanism that can save the global economy at this point. However, the general level of intransigence amongst politicians may very well inhibit the critical development needed most to restore growth. As such, expect continued competitive devaluations to dominate the headlines as policymakers quickly run out of tools and ammunition to stem the crisis engulfing the global economy.
Export Economy Crumbles
Market Trends - 08/09/2015