World trade still driving the recovery

Allister Heath
INVESTORS are right to be worried about the Eurozone. It is the most dangerous part of the world economy, a flawed and failing construct which poses a great threat to the financial system and to the recovery. A Chinese collapse looks much less likely, however, though it is clear that anything that were to derail the bounce-back in world trade would be a disaster.

Ian Harwood of Evolution Securities points out that the exceptional performance of world trade during the past year has underpinned a robust and synchronised global recovery. The all-important Dutch CPB April figures showed world exports and imports falling back from the previous month. The March gains, however, were exceptionally robust; export and imports in April had each risen at a 20 per cent annualised rate during the previous six months, suggesting no need to worry. The figures are often volatile.

More timely indicators suggest world trade continues to expand. The IATA May air traffic stats suggest freight cargo shipments rose 34 per cent year on year, the strongest gain in the current upcycle. Telling a similarly upbeat story has been the global PMI export orders index, which in April rose to an all-time high, with May seeing only a tiny setback. Another useful indicator are Asian trade figures. Korea’s average export value per working day rose to a record level in May. Trade has been key to the global recovery, thanks to the return of financing as well as the boom in the emerging world. Investors are right to be vigilant – but so far there is no evidence of any real relapse in world trade.

One of the best measures of an economy’s success is job-creation – how many people are able to find work in a country over a long period of time. As a short note by Richard Teather for the Institute of Economic Affairs (IEA) points out, economies with lower levels of public spending tend to outperform countries with higher levels of spending on that measure – a finding which ought to reassure those worried about Britain’s planned real term cuts over the next few years.

The study looks at the EU between 2000-2008; all the countries whose government spent less than 42 per cent of GDP increased the number of people in employment by 10 per cent or more (and usually a lot more). None of the countries whose governments spent 42 per cent or more of GDP managed to grow their employment by more than about 10 per cent over that period.

The sole exception was Italy: its state spends 48 per cent of official GDP but still managed 12 per cent jobs growth. Yet its massive shadow economy, at an estimated 27 per cent of the observed economy, makes its GDP figures particularly unreliable. If they are adjusted to bring Italy’s underground economy to the same levels as seen in other countries then its government spending would be actually less than 42 per cent of GDP – making Italy’s performance much more understandable.

The IEA study shows that the lower taxed countries increased their employment by 27 per cent, while the higher taxed countries increased theirs by 6 per cent. There is bound to be a reduction is public sector jobs over the next few years in the UK – but if the international evidence is any guide, overall employment will start to bounce back as soon as public spending is brought under control once again.