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Chart of the Week : S. Korea trade data are in a free fall

Macro
CD
Christopher Dembik

Head of Macroeconomic Research

Summary:  The bullwhip crunch in global manufacturing is hurting all the world’s largest exporters. In our view, the most vulnerable countries are South Korea, Germany and the United States. But there is more: the situation could further deteriorates if the current overvalued dollar environment causes a global currency crisis. Last week’s Bank of Japan and Japan Ministry of Finance intervention in the FX market is perhaps only the beginning of more interventionism to come.


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South Korea’s exports fell 8.7 % in the first twenty days of September from the same period a year earlier. This matters because South Korea is considered as a bellwether for global trade and growth by economists. The drop is partially explained by holiday effects (the Chuseok holidays from 9 to 12 September) and by slowing growth in main trading partners. Exports to Japan over the same period decreased by 8.2 % and exports to China dropped by a stunning 14 %. This is an indicator of how strong the current slowdown of the Chinese economy is – see the below chart. Exports to Vietnam are falling by 12.9 %. The South-East Asian country is a major trade partner for South Korea. Over the years, many South Korean high-tech companies have sent components to be assembled there (Samsung, for instance). This has accelerated in recent years on the back of the US-China trade war.

A bullwhip crunch in global manufacturing

The counter-performance of South Korea trade is just one of many bad trade indicators that have been released in the recent weeks. For example : container spot rates are set for a hard landing. The bellwether Shanghai Containerized Freight Index is down 58 % since January and spot rates have fallen by around 10 % for the fourth week running. This is the most watched rate indicator on sea freight from China. This is not only caused by the effect of China’s zero covid policy on trade. This reflects first and foremost a slowdown in global demand. The Drewry World Container Index draws a similar picture. This is a composite sea freight rate on eight major routes to/from the United States, Europe and Asia. It has been going down for the 30th week in a row. It is now standing 57 % lower than the same period last year. Global recession or no recession, it seems obvious that the bullwhip crunch in global manufacturing is going to hurt all the world’s biggest exporters, in the same way they enjoyed a massive boom in 2020-21. During the Covid period, consumers have reacted by stocking up on essential goods, thus leading to shortages. Supply chains have had to ramp up production to cope with the unprecedented increase in demand. Now, demand is decreasing due to higher cost of living and fears of recession. The world’s largest exporters are in a tough position. In our view, the most vulnerable countries are South Korea, Germany (where the manufacturing sector is hit by a massive 139 % year-over-year increase in the energy bill) and the United States too.

The beginning of a global currency crisis ?

The risk of a global currency crisis is another headache for exporters. A weak currency is usually beneficial for exports. But a too weak currency often increases the cost of intermediary goods and energy for countries which are dependent on it from external supply. Last week, Japan intervened in the forex market to stem the depreciation of the Japanese yen with the blessing of the U.S. Treasury. However, this is unlikely to succeed unless there is a coordinated intervention by the United States, Europe, Japan and the United Kingdom, as we saw in the September 1985 Plaza Accord. Other countries are favoring less costly options – forex interventions are depleting foreign reserves and are rarely successful in the long run. For instance, they are providing FX hedging protection to most-exposed companies. This is the pace chosen by South Korea. On 23 September, the government decided to use the country’s foreign exchange equalization fund to meet shipbuilding companies’ forex hedging demands for their overseas orders. As currency volatility is increasing in an overvalued dollar environment, expect more and more countries and central banks to try to rein in the depreciation of their local currency. But we doubt this will be enough to revive global manufacturing.

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