FX International Payments
By Frances Coppola
But that doesn’t seem to be the case. The World Trade Organization’s (WTO’s) latest forecast for global trade shows a slowdown in 2016: “World trade will grow more slowly than expected in 2016, expanding by just 1.7 percent, well below the April forecast of 2.8 percent, according to the latest WTO estimates. The forecast for 2017 has also been revised, with trade now expected to grow between 1.8 percent and 3.1 percent, down from 3.6 percent previously. With expected global GDP growth of 2.2 percent in 2016, this year would mark the slowest pace of trade and output growth since the financial crisis of 2009.”1
The slowdown in global trade growth is happening despite interest rate cuts by central banks around the world, in developing as well as developed countries. Since the beginning of 2016, there have been 69 interest rate cuts.2 Among the countries cutting interest rates are Australia, New Zealand, Indonesia, South Korea, Malaysia and India: China’s slowdown, coupled with commodity price falls, seems to be affecting economies throughout the Asia-Pacific region.3 However, in Russia and Eastern Europe, where interest rates have been very high in the last couple of years due to inflation, interest rate cuts can be a sign of economic improvement. In October 2016, Kazakhstan’s central bank cut interest rates by 0.5 percent (to 12.5 percent), commenting that “the reduction in the base rate reflects positive trends in the key segments of the external market, as well as a stable situation in the domestic financial market.”4
Among developed nations, the USA has not cut interest rates but has backed off from expected increases. Since interest rate expectations to some degree govern prices in capital markets, this has had a similar effect to rate cuts.5 Japan, the U.K. and the Eurozone have actually cut interest rates, in Japan’s case into negative territory for the first time. All three are also doing various forms of quantitative easing (QE), which tends to lower interest rates on bonds. Government bond yields for Japan, Switzerland and Germany are all below zero far into the future: investors will pay Switzerland’s government to invest in its borrowing for the next 30 years.6 Because of corporate bond-buying programs by central banks, as well as spill over effects from conventional QE, some corporations also are able to issue debt at negative rates.7 Even some households can borrow at negative rates: in Denmark, one couple found themselves with a negative rate on their mortgage.8
The slowdown in global trade and output is thus something of a mystery. Of course, the squeeze could be worse if central banks were not cutting interest rates. But their actions aren’t enough to restore global trade and output to their pre-2009 level.
Analyses of the causes of the global trade slowdown tend to focus on China, commodity prices and shortening of business supply chains.9,10,11 The WTO also notes that the USA is no longer acting as “importer of last resort”: “The contraction was driven by slowing GDP and trade growth in developing economies such as China and Brazil but also in North America, which had the strongest import growth of any region in 2014-15 but has decelerated since then.”12
But with so much help for borrowing, why are America’s imports declining? Indeed, why is global trade slowing? A leading Deutsche Bank economist talks of the “confidence cost” of low interest rates13 – and indeed, the OECD’s business confidence index (BCI) shows that global business confidence is declining.14 It appears that low and negative interest rates themselves might be having a negative effect on global trade.
Some economists theorize that low and negative interest rate policies could be making the global economy worse. The theory goes that reducing interest rates, especially far out into the future, creates expectations of lower inflation. So, central banks targeting higher inflation drop interest rates lower in the hope of boosting economic activity through more borrowing – but instead, economic activity has been declining. So inflation falls – and central banks drop rates even lower. Eventually interest rates reach a level (the “zero lower bound”) at which it becomes cheaper for people to hoard cash than invest in anything productive, and the economy grinds to a halt.15
Other economists say that rates are not low enough to stimulate the necessary borrowing, and central banks should cut rates deeply into negative territory. To support this, they argue for the elimination of physical cash (notes and coins), or the introduction of a mechanism to charge interest on them.16
The economist Richard Koo says that the real problem is too much debt. Households and businesses won’t borrow more when they are highly indebted and trying to reduce their debt burdens. Rather, they cut spending and direct money into debt repayment. This makes their individual balance sheets more resilient to future shocks, but economic activity declines when everyone does so simultaneously. Koo suggests that perhaps the problem now is that the whole world is trying to reduce debt and make balance sheets more resilient.17
There certainly doesn’t seem to be the resurgence in cross-border lending that might have been expected from low and negative interest rates. The Bank for International Settlements (BIS) says that cross-border lending (loans and bonds) remains considerably lower than before the 2008 financial crisis and shows no sign of improving. Cross-border lending to (a.k.a., “claims on”) developing market economies actually fell in the first half of 2016: “Between end-December 2015 and end-March 2016, claims on the rest of emerging Asia fell slightly (by $2 billion), while the year-on-year change was -6 percent. The latest decline resulted from a $16 billion fall in interbank activity and an $11 billion expansion of cross-border claims on the non-bank sector. Cross-border bank credit to Latin America and the Caribbean contracted (by $9 billion) during the first three months of 2016, for an annual growth rate of -3 percent. This third consecutive quarterly decline was driven by a sharp fall in lending to Brazil (-$14 billion), whose cross-border borrowing contracted by 14 percent in the year to end-March 2016.”18
The WTO also specifically cites Brazil as a country where international trade, especially imports, has fallen significantly in 2016. This suggests a connection between the decline of cross-border lending and the slowdown in global trade. Of course, whether the trade slowdown caused the fall in lending or vice versa is not clear.
Since the 2008 financial crisis, there has been a slowdown in global trade and a concurrent decline in cross-border lending (both bank loans and bonds). A growing number of central banks are resorting to interest rate cuts and QE to stimulate the economy, in some cases driving interest rates negative far into the future. Despite central banks’ intent to the contrary, negative rates may be counterproductive for global trade growth – or they may be more a symptom than a cause, indicating worries about the future and a preference for avoiding risk. Either way, while business confidence remains low negative rates may be with us for a while.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
1. “Trade in 2016 to grow at slowest pace since the financial crisis”, The World Trade Organization;https://www.wto.org/english/news_e/pres16_e/pr779_e.htm .
2. “Worldwide central bank rates”, cbrates.com; http://www.cbrates.com/decisions.htm
3. “The economic effect of China’s import-export trade slowdown”, AMEX FXIP Blog; https://www.americanexpress.com/us/foreign-exchange/articles/economic-effects-of-china-economic-slowdown-on-import-export-trade/
4. "On the base rate", National Bank of Kazakhstan press release; http://www.nationalbank.kz/cont/PR_%D0%B1%D0%B0%D0%B7%D0%BE%D0%B2%D0%B0%D1%8F%20%D1%81%D1%82%D0%B0%D0%B2%D0%BA%D0%B0_%20%D0%BE%D0%BA%D1%82%D1%8F%D0%B1%D1%80%D1%8C%202016%20Eng(final).pdf
5. Rational expectations and the term structure of interest rates, Journal of Money, Credit and Banking; http://pages.stern.nyu.edu/~dbackus/Identification/Sargent_ts_JMCB_72.pdf
6. “Yield Curves”, SIX Swiss Exchange; https://www.six-swiss-exchange.com/services/yield_curves_en.html
7. "Henkel and Sanofi sell the first negative-yielding Euro corporate bonds”, Financial Times; http://www.ft.com/fastft/2016/09/06/henkel-and-sanofi-sell-first-negative-yielding-euro-corporate-bonds/
8. "Negative Rates Around the World: How One Danish Couple Gets Paid Interest on Their Mortgage", Wall Street Journal; http://www.wsj.com/articles/the-upside-down-world-of-negative-interest-rates-1460643111
9. "World Trade Set for Slowest Yearly Growth Since Global Financial Crisis", Wall Street Journal; http://www.wsj.com/articles/world-trade-seen-growing-at-weakest-pace-since-financial-crises-1474965904
10. "Becalmed", The Economist; http://www.economist.com/news/finance-and-economics/21665040-slowdown-global-trade-growth-bad-news-many-emerging-markets-becalmed
11. "Explaining the global trade slowdown", VoxEU (The Centre for Economic Policy Research); http://voxeu.org/article/explaining-global-trade-slowdown
12. "Trade in 2016 to grow at slowest pace since the financial crisis", The World Trade Organization; https://www.wto.org/english/news_e/pres16_e/pr779_e.htm
13. Negative interest rates: confidence costs outweigh small economic benefits, Deutsche Bank Research; https://www.brookings.edu/wp-content/uploads/2016/05/Slok2_Presentation_Brookings_2.pdf
14. OECD (2016), Business confidence index (BCI) (indicator). doi: 10.1787/3092dc4f-en (Accessed on 02 October 2016); https://data.oecd.org/leadind/business-confidence-index-bci.htm
15. "Neo-Fisherism: a radical idea, or the most obvious solution to the low inflation problem?", St. Louis Federal Reserve; https://www.stlouisfed.org/publications/regional-economist/july-2016/neo-fisherism-a-radical-idea-or-the-most-obvious-solution-to-the-low-inflation-problem
16. Breaking through the zero lower bound, International Monetary Fund; https://www.imf.org/external/pubs/ft/wp/2015/wp15224.pdf
17. The world in balance sheet recession: causes, cure, and politics, Koo, Richard; Real-World Economic Review, issue no. 58, pp.19-37; http://www.paecon.net/PAEReview/issue58/Koo58.pdf
18. "Highlights of global financial flows", BIS Quarterly Review September 2016; https://www.bis.org/publ/qtrpdf/r_qt1609b.htm