From Boom To Bust

Here are some of the biggest stories from last week:

• Global trade growth is set to more than double this year.
• China’s exports and imports returned to growth in April.
• The Bank of England held interest rates steady but signaled a cut in the summer.
• Pandemic-winning stocks have shed $1.5 trillion in market value since the end of 2020.
• Commodities are unlikely to remain a major disinflationary force in the coming years.

Dig deeper into these stories in this week’s review.

Macro

In welcome news to the global economy, several major organizations are predicting a sharp rebound in the international flow of products this year amid resilient economic growth and easing inflation in many parts of the world. According to the OECD, global trade in goods and services is expected to rise 2.3% in 2024 and 3.3% in 2025, primarily driven by the US and Asia. This contrasts with growth of just 1% last year, when rising prices, surging interest rates, and sluggish demand all weighed on activity.

However, despite the rebound, global trade growth is still not expected to return to pre-pandemic levels in the coming years. Goods and services trade volumes grew at an average annual rate of 4.2% between 2006 and 2015, according to the IMF. What’s more, both the OECD and IMF have warned about risks to trade caused by geopolitical tensions, regional conflicts, and economic uncertainty, as governments prioritize national security, self-reliance, and support for domestic companies.

Speaking of global trade, new data this week showed China’s exports and imports returned to growth in April. Exports increased by 1.5% in dollar terms from a year earlier, helping to reverse a sharp drop in March. Imports, meanwhile, climbed by 8.4% in April on a year-over-year basis after shrinking the month before, with the surge driven by strong Chinese buying of microchips and other computer components. Both figures topped economist forecasts and confirmed signs that global demand is strengthening, which will provide a welcome boost to domestic growth. See, China is trying to rely on strong sales abroad to offset weak consumer spending at home, where a real estate slump has led households to tighten their belts.

Over in the UK, Bank of England committee members voted seven to two to keep the benchmark interest rate unchanged at a 16-year high of 5.25%, with the two dissenting members calling for an immediate cut. But the bank struck an optimistic tone, noting that things are moving in the right direction and signaling that it would lower rates this summer if it sees further evidence of inflation remaining low. After the meeting, traders slightly raised their bets on the BoE’s first rate cut in four years to come in June: they now see a 55% chance of a reduction happening that month. Regarding growth, the BoE reckons that last year’s shallow recession has ended, and that the UK economy will grow by 0.5% this year and 1% in 2025. That’s an upgrade from its February forecast of 0.25% and 0.75%, respectively.

Stocks

The coronavirus pandemic, which prompted strict lockdowns worldwide, forced millions to work from home in 2020. And this dramatic change in habits boosted the market values of certain stocks dubbed as pandemic winners, which predominantly belonged to tech companies. Video-conferencing company Zoom, for example, saw its stock price almost quintuple in 2022. Shares in exercise bike maker Peloton, meanwhile, soared 434%.

But according to an analysis by the Financial Times this week, the 50 stocks that made the biggest percentage gains in 2020 have collectively shed more than a third of their total market value since then – the equivalent of $1.5 trillion. The losses come as the sharp acceleration of trends driven by lockdowns, such as videoconferencing and online shopping, prove to be less durable than expected, as more workers migrate back to the office and high interest rates and living costs hit ecommerce demand.

Commodities

Just last summer, central banks were celebrating the significant progress they had made in taming red-hot inflation. In the US, for example, a heavy barrage of interest rate hikes had stomped consumer price rises down to a yearly pace of just 3% in June 2023, compared to 9.1% in June 2022. But then, well, things kind of stopped in their tracks, and a big part of that comes down to commodity prices.

Global commodity prices tumbled 40% between mid-2022 and mid-2023, with oil, gas, and wheat among those falling most sharply. That helped drive down global inflation by about 2 percentage points over the period, according to the World Bank. But that trend of falling prices is unlikely to continue in the coming years, as geopolitical tensions dent commodity supplies and demand for industrial metals and those used in the energy transition continues to grow.

Put differently, the World Bank reckons that commodity prices have plateaued, putting an end to a big disinflationary force around the world. It forecasts that commodity prices will fall by just 3% in 2024 and 4% the year after – small dips that’ll do little to quell above-target inflation. And even after these declines, prices are expected to be about 38% higher than they were on average between 2015 and the start of the pandemic in 2020.

What’s more, the bank warned of upside risks to its forecasts – namely the possibility of tensions escalating in the Middle East, which could drive oil prices significantly higher and undermine much of the progress made in reducing inflation over the past two years. The bank forecasts that in a worst-case scenario, oil prices could blast past $100 a barrel this year, which would push up global inflation by nearly 1 percentage point.

In summary, if central banks can no longer rely on falling commodity prices as a major disinflationary force in the coming years, then they might struggle with the final stretch of lowering inflation back toward their targets. That means interest rates could remain higher than expected this year and next.

Next week

• Monday: Nothing major.
• Tuesday: UK labor market report (April), China foreign direct investment (April), US producer price index (April). Earnings: Alibaba, Home Depot.
• Wednesday: US inflation (April), US retail sales (April), eurozone industrial production (March). Earnings: Cisco.
• Thursday: Japan GDP (Q1), US industrial production (April), US housing starts (April). Earnings: Baidu, Walmart, Deere, JD.com, Applied Materials.
• Friday: China industrial production and retail sales (April).