Limits of globalisation point to higher inflation – L&G

Global trade data suggest there has been as slowing in globalisation over the past half decade, which is likely to result in higher inflation globally as the economic benefits of specialisation are eroded, says Legal & General Investment Management economist James Carrick.

Initially looking at import data for the UK, Carrick said he noticed that the trend of growing imports has stopped in recent years, and instead the level of imports relative to GDP has remained constant. This means that any random item purchased in the UK is as likely to have been manufactured in the UK as it was six years ago.

While this might seem positive for UK GDP, as it implies demand for domestic manufactures is holding up, the problem occurs when all countries perform similarly. Data from the IMF for global trade in goods and services points to a similar trend at the global level. In effect this means, Carrick said, that the effects of globalisation have slowed, as individual countries have stopped increasing their purchase of goods and services from each other.

On the basis that increased specialisation of economic activity – such as Chinese manufacturing of telecommunications equipment from components sourced from countries such as Japan, the UK and the US – has been a driver of lower prices, then a fall off in trade growth suggests that economies could suffer increased inflation.

China is important in this respect, because its own so-called import penetration has fallen even faster than the Euro 4, UK or US in recent years, reflecting its desire to create a more diversified economy that does not simply import materials for re-export as finished goods. Data on processed exports supports this idea.

An example of how this is being felt is in the area of telecommunications equipment, Carrick said. Chinese manufactured mobile phones are taking a bigger share of the global market. At the same time, the manufacturers are starting to source key components such as chips from Chinese manufacturers rather than from the US or elsewhere.

But China is also facing rising wage costs even as it seeks to rely on its own sources of components. One region where this type of cost pressure is being seen is North America, where Mexico has stopped losing market share in the US to Chinese manufactured goods.

Meanwhile, in the UK, a peak in import weighted GDP was seen in around 2006-7, since when as a percentage it has remained steady. During the same time, prices declined to a trough in 2008-9, but since then prices as expressed by the non-energy consumer goods price index have risen sharply.

With Chinese wages rising fast, and no ability to further offshore its own manufacturing base to countries such as Vietnam – there is simply not enough infrastructure to do this, Carrick said – and levels of global trade seemingly moving sideways rather than growing, then it is likely that there will be a contributory effect to inflation – what Carrick terms structurally higher global inflation.


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