The drag of present oil prices is evident today in Japan’s trade surplus data for April. Japan’s trade surplus (exports over imports) “tumbled by a worse than expected 46.3% in April due to the rising cost of energy imports and falling exports to the US economy,” the government said Thursday. “Exports to the European Union grew by the slowest pace in more than two years.”
“The data showed that Asia’s largest economy continues to be pressured by a global economic slowdown,” despite “brisk shipments to fast-growing emerging markets.”
The point to be understood here is that Japan’s exports over imports shrank by almost half in April, notwithstanding ongoing strong demand from emerging markets.
Emerging countries are just not nearly as good at consuming as westerners. As a point of reference, US consumers in 2006 consumed 9.7 trillion dollars worth of goods compared to about 1.3 trillion of goods consumed in China and 750 million in India. US consumers are almost 10 to 1 better at buying goods than Chindian consumers. This is why a big contraction in western consumption inevitably brings a big contraction in world GDP.
What is happening to Japan and other export nations on a macro level is also happening to manufacturing corporations on a micro level. Rising commodity prices are putting a strain on corporate costs. Ongoing demand reflects in reasonably strong sales volume and revenue, but not necessarily in strong profits. The soaring costs of energy and raw materials are silently undermining corporate profitability. Commodity prices have now risen faster than companies can pass through price increases to consumers, this is resulting in contracting profits and waning investor confidence.
While there has been much talk of rising CPI or consumer prices, the more troublesome increases are mounting in the PPI, producer price index. In the UK for example, producer prices in March jumped 19% y/y compared to only 2.4% y/y in the CPI.
Now falling demand, rising commodity prices, and higher financing costs are all creating the perfect storm for corporate profits. See Overview: The commodity squeeze.
Survival will mean increasing prices, and cutting overhead costs that can be cut, such as labour. This will mean less hours worked, further lay-offs and in some cases corporate bankruptcy.
We have had an abnormally high period of corporate profit growth over the past few years, compression of this will be a natural part of mean reversion over the months ahead.
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