According to global credit insurer Coface, the increased globalization of the world’s economies contributed significantly to the shock of the two-year worldwide credit crisis-the worst in 60 years. The good news is that we’re finally in recovery mode, yet ‘threatening bubbles’ like public debt, overcapacities in China, and stock market volatility could easily mar the landscape. We again turned to Coface this year for their risk assessments for ten of the U.S.’ top 15 trade partners in order to gain a deeper understanding of what other countries’ economies are facing. – Lara L. Sowinski

  Top U.S. Foreign Trade Gateways (pdf)

Canada

With exports representing a quarter of GDP and three-quarters destined for the U.S., the Canadian economy could scarcely escape the difficulties of its big neighbor, the U.S. Nonetheless, the shock was absorbed in good part by sustained household consumption that did not suffer from the end of any real estate bubble (except in the Western provinces under the influence of spiraling raw material prices) nor from any weakness in the banking sector.

As in the U.S., growth returned as from summer 2009 and will accentuate in 2010. An accommodating budget policy will also make a contribution.

Agricultural raw material and mineral exports will benefit from sustained demand from the emerging economies and from higher commodity prices. Sales of manufactured products will benefit from the recovery, even modest, of U.S. demand despite a fresh appreciation of the Canadian dollar against the U.S. dollar.

Meanwhile, contrary to their American counterparts, households have not seen a fall in the value of their assets nor a drop in their salaries. Employment levels have fallen slightly and unemployment statistics are steadying. Finally, tax concessions facilitated by the healthy state of public finances help support their purchasing power.

China

The economy began to slow in 2008 mainly as a result of internal imbalances (overcapacity in several sectors) and restrictive economic policies no longer geared to economic conditions. The effect of these domestic factors has been compounded by the contraction of exports since the 2008 4th quarter. Bankruptcies increased in industries suffering from overcapacity and among low value-added export companies, particularly in the Guangdong region.

Indeed, the risk of payment default remains to be watched in certain sectors, especially the low value-added industries (textiles, shoes, toys) and those in overcapacity (automotive, construction, steel industry). Meanwhile, the government is working at encouraging the upgrading of the economy to higher value-added activities. Also, with the stimulus package continuing to stimulate investment, the risk of overcapacity will remain a major weakness inherent in the growth pattern in the medium-term.

Meanwhile, China’s economic policies in 2010 will be to strengthen growth while making it more balanced. In addition, investment in infrastructures should continue, while spending in sectors suffering from overcapacity will be limited. On the other hand, the authorities will support seven specific sectors considered as particularly promising and strategic to the objective of promoting innovation and providing a broader base for the economy. In addition, measures to encourage household demand will be maintained and strengthened.

Mexico

Mainly as a result of the sharp economic contraction in the U.S., Mexico suffered a recession in 2009 more severe than the one associated with the economic and financial crisis of 1994-95, nicknamed “Tequila”. Following this shock, the resurgence of activity is linked to economic recovery in the United States; having begun at the end of 2009, recovery is expected to continue in 2010. This means that growth will chiefly be led by external demand, which favors export manufacturing. Any increase in internal demand is likely, in contrast, to be more modest.

The effects of the recession have undermined public finances, although the fiscal austerity measures planned for 2010 should make it possible to limit public deficit.

On the political front, President Calderon’s conservative PAN party has lost its plurality to PRI, the dominant party from 1929 to 2000. In the second half of his term, the President will be faced with governability problems and progress on reforms will come up against political foot-dragging and even-stronger social resistance. And, the exacerbation of the climate of insecurity and violence fomented by organised crime connected with drug trafficking constitutes a growing challenge to President Calderon’s authority.

Meanwhile, Chinese competition in the low value-added consumer goods sectors continues, while sectors associated with distribution, and especially tourism, will likely continue to suffer. However, the outlook for industry, particularly automobiles and construction, seems upbeat, which in turn has a positive effect on services.

Japan

Exports have been growing, up over 8 percent in January, fueled by demand from other Asian economies, particularly China (16 percent of Japanese sales abroad). Indeed, the renewal of vehicle purchase support measures by the Chinese government through December will enable the automotive sector to achieve significant earnings. Following a drop of 25 percent in 2009, Japan’s exports, however, return to their pre-crisis level until household consumption in OECD countries (30 percent of export sales) unequivocally picks up. Furthermore, the appreciation of the yen against the currencies of Japan’s main trading partners will-if it persists-constitute a risk by making Japanese products less competitive and undermining the profits of companies operating abroad.

Germany

After three quarters of recession, GDP growth returned in the second and third quarters last year thanks to a timid revival of exports and the steadiness of consumption. However, activity stalled in the fourth quarter and shouldn’t have performed any better in the first quarter this year. The recovery is expected to firm up in the second half this year at the earliest with the upturn of world trade.

Although capital goods exports will be buoyed by the investment recovery in emerging countries, they will benefit hardly at all from demand in developed countries, especially European ones, where capacity utilization rates will remain low. Net trade contribution to growth will be limited by the fact that imports are recovering faster than exports.

United Kingdom

Developing in the last quarter of 2009 following six quarters of recession, the recovery has been slow to take hold. Domestic demand particularly suffered from the difficulties in the financial and property sectors, evidenced by high household and corporate debt.

The recovery will be weak in 2010, resting essentially on restocking and exports, while domestic demand will be sluggish with households and companies still far from having sufficiently reduced their debt and cleaned up their balance sheets.

In spite of the fall of the pound (-25 percent against the dollar and the euro since the beginning of the crisis), exports are struggling to get off the ground. Sales of services (40 percent of exports) are not reviving, while those of manufactured goods composed more than 50 percent of transport equipment, electrical goods, machines and metallurgical products, continue to suffer from the economic downturn of the European continent and the erosion of the industrial base. In contrast, the pharmaceutical, bio-technological and food processing sectors continue to perform well.

South Korea

Due to the country’s openness and integration into international capital markets, South Korea has been affected deeply by the crisis. While economic activity had reached its low point in the fourth quarter of 2008, growth remained negative in the first half of 2009. Exports, which represent about 50 percent of GDP, declined especially in the automotive, electronics and machine sectors. Investment, especially in the construction, automotive, and shipbuilding sectors, was also hit hard.

In 2010, with the gradual resumption of growth worldwide, activity has rebounded. Exports have increased again, notably to China, Korea’s main trading partner.

France

Growth accelerated noticeably in the fourth quarter of 2009 (by 0.6 percent), fueled essentially by household consumption, in particular in the manufactured goods sector, and by the variation of stocks. Nonetheless, in January, purchases of durable goods again slid back, and in February household confidence deteriorated. It’s likely this will spell a decline in spending by French consumers in 2010, as the effects of the government’s recovery plan begin to wear off.

Residential investment will remain relatively anemic until the end of 2010 with housing loans then rekindling a slight upturn after a two-year slowdown. The softness of the recovery expected in Europe (two-thirds of exports) will not be propitious to a strong recovery of exports, an area where companies have been gradually losing market share.

Netherlands

The economy suffered a violent downturn in 2009 triggered by the sudden collapse of global demand with both exports and corporate investment falling as a result. Households cut spending and their savings rose by five percentage points (18 percent of disposable income). In 2010, continued support measures by the government and an upturn in foreign demand will underpin economic growth that will nonetheless remain soft.

The modest recovery of the economies of the Netherlands’ main trading partners (especially Germany and France) will enable exports to begin growing again, although weakly. Productive investment will, however, continue to contract with debt-ridden companies preferring to use overcapacity to fill new orders and replenish stocks. Despite the weakness of domestic demand, imports will grow as fast as exports, driven by the re-export business characteristic of the Netherlands’ foreign trade. The current account will thus show a surplus of 5.5 percent of GDP.

Taiwan

Taiwan was significantly affected by the crisis. The recession is mainly attributable to the weakening of foreign demand, particularly from China, Hong Kong, and above all, the U.S.-the island’s main trading partner and ultimate re-export destination for about 70 percent of Taiwan’s exports to Mainland China. The contribution of net exports and investment to GDP growth was negative in 2009. Conversely, consumption, spurred by the stimulus plan, proved relatively resilient to the crisis. On the supply side, the drop in foreign demand affected the machinery and electronics sectors, which represent over 50 percent of exports. In particular, laptops and LCD monitors-products where Taiwan is the leader-were the first branches to suffer. The services sector (especially tourism, wholesale commerce, and financial services) also contracted. wt



For additional risk assessment and analysis, visit http://www.coface.com/CofacePortal/COM_en_EN/pages/home/risks_home/country_risks.