Global trade is set to recover in the coming months, supported by foreign exchange movements, bottomed out international manufacturing cycle and improved Dow Jones transportation average, according to QNB.
"In our view, leading indicators suggest that global trade may have reached the bottom of its slump and is set to begin a phase of recovery," QNB research said.
In support of this, it said foreign exchange movements are likely to provide support to international trade, which is a key indicator of the dynamism of the global economy.
Trade data reflects, like few other indicators, the strength of economic conditions across different countries. Historically, global trade tends to be negatively correlated with the US dollar (USD), it said, adding as the USD weakens, the global trade expands on the back of cheaper imports outside the US.
Finding that more than 50% of trade deals are denominated in USD, it said as the dollar has depreciated by 10% since its peak in September 2022 compared with a basket of major currencies, global trade should be supported by expanding imports in countries other than the US.
"Such dynamics could be further boosted by additional USD depreciation, if the US Federal Reserve halts its tightening cycle ahead of the European Central Bank and the Bank of England," QNB said.
Highlighting that the global manufacturing cycle is likely reaching its bottom in major advanced economies; it said the manufacturing cycle in the US has typically lasted three years, equally divided into 18 months of contraction and 18 months of expansion.
According to the Institute of Supply Management survey tracking activity in the manufacturing sector, the current down-trend began in mid-2021. Since then, industrial activity has already stabilised.
In the Euro area, QNB said manufacturing has followed similar dynamics as in the US, and is expected to recover in the second half of the year on the back of improving real incomes, the receding energy crisis and lower natural gas prices, and the need to replenish inventory levels after a destocking phase that has weighed on activity.
"Global trade is expected to receive an additional boost as manufacturing seems to be bottoming out in the two major advanced economies," it said.
The research said expectations of forward-looking investors suggest renewed optimism and anticipate an improvement in the international trade outlook.
In this regard, it said a useful indicator that embeds these expectations in the stock markets is the Dow Jones Transportation Average, an equity index comprised of airlines, trucking, maritime transportation, rail-road and delivery companies.
"The performance of this indicator tends to foresee global exports by at least three months. Since its bottom in April this year, it has recovered by 14%, suggesting that global trade should return to expansionary mode in the second half of 2023," QNB said.
Global trade volumes seem to have bottomed out, and leading indicators suggest that they are entering a phase of recovery, it said, adding trade is a good reflection of macroeconomic conditions and provides another metric of the resilience of the global economy.
