Size matters: what small countries teach us about global trade

The third quarter is revealing clearer signs of the growing impact of tariffs on the US, primarily its nominal economy. While the future of the US is not synonymous with the future of the global economy – and there is no need to worry about rising inflation in Europe at present – we acknowledge the importance of the US for markets and the world. 

Although price movements can vary among countries, it is rare for a slowdown in a major economic zone not to drag down the rest of the world: prices are a domestic matter, but growth is global and reflected in world trade. Prices may be measured relatively rapidly, but the situation differs considerably when it comes to Gross Domestic Product growth or global trade. These metrics are only properly measured with a significant delay, leaving us to use survey data to form preliminary assessments. 

This week, Simply put asks what we can discern about the state of global trade from these ‘leading’ indicators. Even though such data has been questioned lately, it likely contains valuable information to help us prepare for the rest of the year.

Read more: Could mixed US jobs market data signal a slowing economy?

So far, so good

There are few measures of the global trade cycle, and so the most used series for this purpose are probably those from the CPB (Centraal Planbureau). The CPB is an independent Dutch research institution that produces the CPB World Trade Monitor, an authoritative data source for global trade statistics. This monitor provides monthly updates measuring fluctuations in the volume and prices of world trade, covering about 85 countries and 95% of global trade. Currently, we only have data up to June 2025. 

Global trade contracted by 1.6% in Q2, but we are not overly concerned just yet given the 3.2% gain in Q1. World trade still remains in expansion for 2025, as shown in Figure 1. The volume growth at mid-year is broadly in line with the annual progression in 2023 and 2024, and is not comparable to the trade contractions seen in 2015 (Chinese slowdown and oil crisis), 2018 (the first American tariffs) and 2022 (global slowdown due to central bank rate increases). Should we therefore cease to worry about the impact of the trade war on global commerce?

FIG 1. Annual global trade volume growth¹

What lies ahead?

The challenge clearly lies in the forward-looking nature of financial markets. The issue is not whether everything appears fine in the rearview mirror of statistical data, but whether the situation will deteriorate in the third quarter. 

One way to gauge this involves examining higher-frequency data, but not just any data. The progression of surveys, such as the manufacturing ISM or US job creation, is only indirectly influenced by fluctuations in the global trade cycle. Each decline in trade coincides with a slowdown in global demand, and thus the main aggregates positively linked to growth also deteriorate. However, the direction of causality is reversed: when GDP slows, world trade slows too. 

Another strategy is to observe that smaller G10 countries are naturally more ‘open’ than larger ones, and they suffer more readily from weakening global trade. Consequently, the relative behaviour of survey data in countries that are open to global trade and those that are less so can be informative. Figure 2 shows the relative trajectory between these countries from the perspective of our nowcasting indicators. On the ‘open’ side are Switzerland, Sweden, Norway, New Zealand, the UK and Canada. The less trade-exposed countries include the eurozone, the US, China and Japan.

When smaller countries suffer

Figure 2 presents this relative growth nowcaster trajectory as compared to the actual growth of world trade. The graph clearly shows that when open countries suffer more than closed ones, world trade growth tends to be negative. The 2015 example is particularly illustrative in this regard. 2020 is less so, but the trade slowdown then reflected a phenomenon affecting all global economies. 2018 was less about declining world trade as it was a period of global slowdown, particularly in the US. Today, we face a similar period of weakness, and two observations can be made:

• First, this weakness is consistent with 2018 but is less severe than in 2015. Thus, a slowdown in world trade is possible, but the magnitude remains limited
   
• Second, this slowdown is not new, but is partly due to the deterioration in global growth induced by the 2022 interest rate shock (as discussed previously in Simply put). This factor has weighed more heavily on open economies than closed ones.
   

Read more: Are investors underestimating fundamental risks?

The conclusion is therefore ambiguous. Yes, small open economies exhibit less economic dynamism than larger, more integrated ones. However, this is not a new feature of the global economic situation, and the trade war might simply contribute to it without causing a global recession (based on the data available to date).


FIG 2. Nowcaster spread between open/closed economies vs. actual world trade growth²

The investment implications for multi-asset investors 

We continue to view 2025 as follows: financial markets have rallied at a level usually aligned with the best years of economic growth, which has elevated valuations. A number of uncertainties remain. Bond risk also remains high (as highlighted by our risk and trend signals) while global economic growth remains below its overall potential (as shown by our economic signals). Nevertheless, the normalisation of global equity risk and recent market performance remain solid reasons to maintain long-term exposure to global markets.

Simply put, global trade could remain in ‘slow growth’ mode over the coming months, with more open economies underperforming those that are less so.

Macro/nowcasting corner

The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises, and global monetary policy surprises is designed to track the recent progression of macroeconomic factors driving the markets.

Our nowcasting indicators currently show:

• Our growth signal continued to decrease and indicates a low and stable growth regime. The main drivers came from the deterioration of employment data in the US and the eurozone
• Our inflation nowcaster also declined, particularly in the eurozone, where it is approaching the 50% threshold
• The signal for our monetary policy indicator increased in the US, but remained stable in both China and the eurozone.
   

World growth nowcaster: long-term (left) and recent evolution (right)

Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).