Trade Woes in Asia Bring Inflation Relief to U.S. Consumers
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Trade Woes in Asia Bring Inflation Relief to U.S. Consumers

But slowing exports to Western nations won’t alone stem rapidly rising prices

By JASON DOUGLAS
Mon, Jun 26, 2023 8:47amGrey Clock 4 min

SINGAPORE—Sinking global trade is pummelling Asian exports, bringing some relief on inflation to U.S. and other Western consumers.

But easing prices for home furnishings, electronics and other manufactured goods don’t signal high inflation will soon be defeated. Wage growth and services price gains are still elevated. And central banks in the U.S. and Europe are warning they aren’t finished raising interest rates in their fight to cool inflation.

Cheap Asian goods helped keep a lid on price growth for decades before the pandemic. Economists say that phenomenon is unlikely to return with the same intensity now that the high-water mark of globalisation has passed.

Asia’s powerhouse exporters enjoyed a boom in overseas sales during the pandemic as locked-down consumers splurged on new computers, workout gear and home improvements.

On a rolling 12-month basis, the U.S. dollar value of exports from China, Japan, South Korea, Taiwan and Singapore peaked last year in September at $6.1 trillion. That was 40% higher than recorded over the 12 months through March 2020, when the pandemic began, according to a Wall Street Journal analysis of official figures compiled by data provider CEIC.

Asian exports started sliding late last year as rising interest rates took some heat out of economic growth. Western consumers have slowed spending on goods in favour of eating out, traveling and other services they missed during the pandemic. Hopes that China’s reopening would spur a rebound in trade have fizzled along with the country’s consumer-led recovery.

Exports from South Korea over the 12 months through May were 11% lower than they were in the year through September. Taiwan exports were down 14% over the same period. Singapore’s were down 6%, Japan’s 4% and China’s by 3%.

The weakness in trade is showing up in the prices charged for goods when they leave Asia’s factories. Chinese producer prices fell 4.6% in May compared with a year earlier, the eighth straight month of declining supplier prices in the world’s largest factory floor. Similar gauges of inflation in other Asian exporter economies are weakening, too, as lower commodity prices reduce costs and collapsing demand for goods saps companies’ pricing power.

The effects of cooling Asia trade are starting to be felt in the U.S., where the Federal Reserve signalled it expects to further increase interest rates after holding them steady this month.

U.S. import prices for goods from Hong Kong, Singapore, Taiwan and South Korea were down 6.3% in May compared with a year earlier, according to the Labor Department. Import prices were down 2% from China and 3.7% from the Association of Southeast Asian Nations, a 10-member group that includes Indonesia, Malaysia and Thailand.

The prices paid by importers don’t quite line up with the prices faced by consumers, as companies need to cover labor, shipping and other costs to get products into stores.

Nonetheless, prices declined in May from a year earlier for a variety of goods in the U.S. that are often sourced from Asia, including furniture, home appliances, televisions, sports equipment, computers and smartphones.

Overall U.S. inflation is proving resilient, though. The consumer-price index, which measures what Americans pay for goods and services, rose 4% in May from a year earlier—twice the Fed’s 2% goal. Core consumer prices, which exclude food and energy, climbed 5.3%.

If surging prices for goods during the pandemic delivered the first burst of inflation, and rocketing energy prices after Russia invaded Ukraine propelled the second, then the current stickiness of inflation is being fuelled by increases in wages and the price of services. So while easing goods-price inflation is welcome, it doesn’t mean central banks have won the battle, economists say.

“The disinflation impulse coming from Asia is not going to be the magic bullet for the West’s inflation problem,” said Frederic Neumann, chief Asia economist at HSBC in Hong Kong, referring to the slowing pace of price increases.

In the decades before the pandemic, the integration of China into the global economy contributed to a long spell of low and stable inflation enjoyed by many Western economies. The broader integration of markets for goods, services, labor and capital under the banner of globalisation meant cheaper goods for consumers and fewer inflation worries for central banks, though economists debate just how big the effects were.

Now, governments and corporations are tiptoeing away from unfettered globalisation in the interests of security and economic resilience. Manufacturers are adding factories in Vietnam or India while reducing their reliance on China, reflecting concern over icy relations between the U.S.-led West and Beijing. Governments are dangling subsidies in strategic industries such as semiconductors and green-technology products to bring investment and jobs home.

Such trade fractures can increase costs for manufacturers, which, alongside healthier global demand, suggests that inflation in the future won’t be as subdued as it was in the recent past, economists say.

That doesn’t mean globalisation is over or that Asia won’t remain a competitive place to manufacture. But it does mean Asia is unlikely to be as potent a force in tempering price gains as it once was.

“The golden era of globalisation—and the disinflationary pressure associated with that—I think that has gone,” said Neil Shearing, group chief economist at Capital Economics in London.



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Cultivating cocoa and coffee requires very specific temperature, water and soil conditions. Now, more frequent heat waves, heavy rainfalls and droughts are damaging harvests and crippling supplies amid ever growing demand from customers worldwide.

“Adverse weather conditions, mostly in the Southern Hemisphere, have played an important role in sending several food commodities sharply higher,” said Ole Hansen , head of commodity strategy at Saxo Bank.

The spikes in prices are a threat to coffee and chocolate makers across the globe.

Swiss consumer-goods giant Nestlé was able to pass only a fraction of the cocoa price increase to customers last year, and it may need to adjust pricing in the future due to persistently high prices, a spokesperson said.

Italian coffee maker Lavazza reported revenue of more than $3 billion for last year, but said profitability was hit by soaring coffee bean prices, particularly for green and Robusta coffee, and its decision to limit price increases.

Likewise, chocolatier Chocoladefabriken Lindt & Spruengli said in its 2023 results that weather and climate conditions played a major role in the global shortage of cocoa beans that led to historically high prices. The company had to lift the sales prices of its products and said it would need to further raise them this year and next if cocoa prices remain at current levels.

Hershey ’s chief executive, Michele Buck , said in February that historic cocoa prices are expected to limit earnings growth this year, and that the company plans to use “every tool in its toolbox,” including price hikes, to manage the impact on business.

In West Africa, where about 70% of global cocoa is produced, powerhouses Ivory Coast and Ghana are facing catastrophic harvests this season as El Niño—the pattern of above-average sea surface temperatures—led to unseasonal heavy rainfalls followed by strong heat waves.

Extreme heat has weakened cocoa trees already damaged from heavy rainfall at the end of last year, according to Morningstar DBRS’s Aarti Magan and Moritz Steinbauer. The rain also worsened road conditions, disrupting cocoa bean deliveries to export ports.

The International Cocoa Organization—a global body composed of cocoa producing and consuming member countries—said in its latest monthly report that it expects the global supply deficit to widen to 374,000 metric tons in the 2023-24 season, from 74,000 tons last season. Global cocoa supply is anticipated to decline by almost 11% to 4.449 million tons when compared with 2022-23.

“Significant declines in production are expected from the top producing countries as they are envisaged to feel the detrimental effect of unfavorable weather conditions and diseases,” the organization said.

While the effects of climate change are severe, other serious structural issues are also hitting West African cocoa production in the short- to medium-term. Illegal mining poses a significant threat to cocoa farms in Ghana, destroying arable land and poisoning water supplies, and the problem is becoming increasingly relevant in the Ivory Coast, according to BMI.

The issues are being magnified by deforestation carried out to increase cocoa production. Since 1950, Ivory Coast has lost around 90% of its forests, while Ghana has lost around 65% over the same period. This has driven farmers to areas less suited to cocoa cultivation like grasslands, increasing the amount of labor required and bringing further downside risks to the harvest, the research firm said.

The Ivory Coast’s cocoa mid-crop harvest—which officially starts in April and runs until September—is expected to fall to 400,000-500,000 tons from 600,000-620,000 tons last year, with weather expected to play a crucial role in shaping the market balance for the season, ING analysts said, citing estimates from the country’s cocoa regulator. Ghana’s cocoa board also forecasts a slump in the harvest for this season to as low as 422,500 tons, the poorest in more than 20 years, according to BMI.

Neither regulator responded to a request for comment.

Meanwhile, extreme droughts in Southeast Asia—particularly in Vietnam and Indonesia—are resulting in lower coffee bean harvests, hurting producers’ output and global exports. Coffee inventories have recovered somewhat in recent weeks but remain low in recent historical terms. Robusta coffee has seen a severe deterioration in export expectations, while Arabica coffee is expected to return to a relatively narrow surplus this year, said Charles Hart, senior commodities analyst at BMI.

The global coffee benchmark prices, London Robusta futures, are up by 15% on-month to $3,825 a ton. Arabica coffee prices have also surged 17% over the last month to $2.16 a pound in lockstep with Robusta—its highest level since October 2022. Cocoa prices have more than tripled on-year over these supply crunch fears, and risen 49% in the last month alone to $10,050 a ton.

“Cocoa trees are particularly sensitive to weather and require very specific conditions to grow, this means that cocoa prices are especially vulnerable to extreme weather events, such as drought and periods of intense heat, as well as the longer-term impact of climate change,” said Lucrezia Cogliati, associate commodities analyst at BMI.

Cogliati said global cocoa consumption is expected to outpace production for the third consecutive season, with intense seasonal West African winds and plant diseases contributing to significant declines.

Consumers hoping for a return to cheaper prices for life’s little luxuries in the midterm may also be in for a bitter surprise.

“There is no sugarcoating it—consumers will ultimately be faced with higher chocolate prices, products that contain less chocolate, and/or shrinking product sizes,” Morningstar’s Magan and Steinbauer said in a report.

“We anticipate consumers could respond by searching widely for promotional discounts, trading down to value-based chocolate and confectionary products from premium products, switching to private-label from branded products and/or reducing volumes altogether.”

The record-breaking rally for cocoa and coffee is likely more than just a flash in the pan, according to Citi analysts, as adverse weather conditions and strong demand trends are likely to support prices in the months ahead. The U.S. bank estimates Arabica coffee futures in a range of $1.88-$2.15 a pound for the current year, but said projections could be lifted if the outlook for 2024-25 tightens further.

At the heart of it all, climate change is set to play a major role, as the impact of extreme weather events could exacerbate the pressure on cocoa and coffee supplies, according to market watchers.

“I don’t expect prices to remain at these levels, but if we continue to see more unusual weather as a result of global warming then we certainly could see more volatility in terms of cocoa yields going forward, which could impact pricing,” said Paul Joules, commodities analyst at Rabobank.

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