Posted on 25 September 2015
"...polls are yet to show the pro independence platform gaining a majority of votes, which should still allow moderates to lead the negotiations with Madrid after December’s national election."
Markets remain febrile – data points and news flow that would often, in calmer waters, pass without much comment are driving wild swings in risk appetite at the moment. China is at the heart of these fears – questions about the extent of China’s ability to bring the world economy down, even in the face of a still broadening recovery in the developed world, are likely to remain inconclusively answered for the moment.
Pick up imminent?
We still suspect that we’re on the cusp of a pick-up in global trade. More often than not, as the world’s largest importer, the US economy is the catalyst for trends in global trade; we see this time as no different. Incoming data on the US consumer, as well as recent statistics on US inbound ports traffic, have done little to dent our belief that brighter times are ahead for global trade.
There has certainly been a subdued trend in global trade volumes for much of the post-crisis period. Both structural and cyclical factors are responsible for this subdued trend. On the cyclical side, the rolling existential crisis experienced by Europe – which accounts for one-third of world trade – has clearly hampered trends in global trade. More recently, the more visible slowdown in parts of China’s economy have certainly had an impact on the commodity trade. On the structural side, one major reason is the slowing pace of trade liberalisation. Negotiating new trade agreements is becoming harder as average tariffs have already fallen dramatically over the last several decades; deals now hinge on much thornier subjects such as labour standards, agricultural protectionism and protection of intellectual property. The biggest deal currently under negotiation, the 12-country Trans-Pacific Partnership (TPP), seems to have stalled recently. Besides that, as Chinese industry develops along the technological value chain, it is producing more domestically; the share of imported components in exports has fallen from 60% in the 1990s to 35% this decade. However, the strong previous relationship still suggests that it is to the US that we must look for signs of what is coming next for global trade. A regression suggests that US real imports explain 76% of the annual changes in world trade volumes since 1995.
The risk of Catalonian independence
Catalonia will hold regional elections this weekend. This regional election will be watched closely given it is a systemic important region (19% of Spanish GDP) and the two largest pro-independence parties will be running on a common platform for the first time. Polls have been suggesting for some time that the pro independence parties will form a government following the weekend’s elections based on obtaining the majority of seats. However, polls are yet to show the pro independence platform gaining a majority of votes, which should still allow moderates to lead the negotiations with Madrid after December’s national election. Our base case scenario is that the new pro-independence government in Catalonia would make demands towards a future referendum, greater regional autonomy (possibly in the form of further transfers of fiscal responsibilities) and, more importantly, greater net fiscal resources for Catalonia. We will obviously be watching the vote count with great interest all the same.
William Hobbs, Head of Investment Strategy, Europe