Last month, we were bracing for the first (monthly) trade deficit of Indonesia since April 2020 amid declining exports (in line with normalizing global commodity prices and subdued global economic growth) and elevated imports. However, this trade deficit didn’t arrive.
Instead, Indonesia enjoyed a very comfortable USD $3.45 billion trade surplus in June 2023. A look at the latest trade data from Statistics Indonesia (Badan Pusat Statistik, or BPS) shows that an unexpectedly large decline in imports (from May 2023) was key to unlock another trade surplus for Indonesia.
Indonesian exports too declined in June 2023, albeit modestly on a month-on-month (m/m) basis. And so, the most interesting matter in terms of trade in June 2023 was the big decline in Indonesian imports. But before we zoom in on Indonesia’s exports and imports we first take a look at international trade.
In terms of global trade it is always interesting to take a look at publications released by the United Nations Conference on Trade and Development (UNCTAD). In its June 2023 report, UNCTAD noted that after a downturn in the second half of 2022, global trade growth was positive for both goods and services in Q1-2023. Trade in goods grew by around USD $100 billion (compared to the value in Q4-2022), while growth in trade of services increased by about USD $50 billion over the same period.
However, the UNCTAD does not expect to see growth in global trade in Q2-2023 as it projects trade at similar levels to Q1-2023, both for goods and services. The key problem is that it sees a slowdown in global trade growth amid persistent inflation and, financial vulnerabilities, along with the ongoing war in Ukraine and geopolitical tensions. And so, overall, the outlook for global trade in the second half of 2023 is pessimistic, as negative factors dominate the positive.
What are the positive factors for global trade?
- Rising demand for services; global commercial services are expected to continue growing in the second half of 2023, primarily driven by an increase in demand for information and communication technology (ICT) services, and due to the rebound in the travel and tourism sectors;
- Trade supporting the green transition; UNCTAD says the patterns of international trade are anticipated to become more closely tied to the global energy transition. Trade and industrial policies reflecting the climate commitments affect trade flows, especially in goods and services-related energy efficient products and renewable energy production. The question we have, though, when reading this passage is to what extent there will indeed be a net increase in volumes and values of global trade as a consequence of the energy transition. The report does not offer an analysis on this topic, and so it seems UNCTAD merely added this factor for political/ideological reasons (the energy transition being in line with the United Nation’s 2030 agenda);
- Shipping costs remain low; global shipping capacity remains strong. For example, the Shanghai containerized freight rate index returned to pre-pandemic levels, and is expected to remain low throughout 2023.
What are the negative factors for global trade?
- Geopolitical factors; the Russo-Ukrainian war and geopolitical tensions remain the biggest factors impacting international trade thorough 2023;
- Weakening global economic conditions; most global economic forecasts have been revised downwards, and economic growth in many countries is expected to remain below historical trends;
- Potential rise in trade restrictive measures; persistent inward-looking policies in the large economies could result in an increase in trade-restrictive measures, which would hold back international trade growth;
- Slowing industrial output; In China and the United States the Purchasing Managers Index eased in May 2023, suggesting a decline in industrial production for the next quarters. China’s exports for May 2023 were also below expectations, which signals weak global demand for goods;
- Inflation, commodity prices, and interest rates; in many economies interest rates are expected to remain high as a result of ongoing inflationary pressures. Despite a downward trajectory, commodity prices (especially in the energy, food and metals sectors) are projected to remain above pre-pandemic averages;
- Concerns of debt sustainability; the current record levels of debt around the world, coupled with high interest rates, will continue to negatively affect macroeconomic conditions in many countries. Economies with underlying vulnerabilities could see further increases in borrowing costs.
What is also very interesting when reading UNCTAD’s latest report, is that China and the United States are becoming less dependent on each other in terms of trade. Both economic giants are trying to find alternative sources for goods amid tensions that started when former US President Donald Trump began a tariff war. The report uses the word “friend-shoring”, which is when supply chain networks focus on countries regarded as political and economic allies. It refers to a situation where there emerge blocs or camps on a global scale that have intensive trade networks (and so, a degree of de-globalization). For example, one could argue that there is developing a United States-European Union camp versus a Russia-China camp. In the case of Indonesia it is best to stay neutral (for as long as that is possible) because the United States and China are both key trade partners of Indonesia.
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