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Price Signals of Global Slack

Some key economies, including the U.S., have been enjoying increased export growth by certain measures. Yet, as discussed in ECRI’s U.S. Cyclical Outlook in January, “the U.S. is able to boost exports only by cutting prices, because exporters simply lack pricing power.”

In fact, year-over-year growth in world trade prices remains in a cyclical downturn, and dropped deeper into negative territory, hitting an eight-month low in December. Indeed, this measure has exhibited almost continuous price deflation since early 2012, barring a couple of abortive forays into positive territory.

As the chart shows, this measure has rarely been so consistently negative, the last occasion being in the wake of the Global Financial Crisis. Before that, it had turned negative around the 2001 U.S. recession.

The other extended period of deflation seen in this measure was for nearly four years in the late 1990s, when a massive once-in-a-lifetime deflationary shock resulted from the integration of China, India, and the ex-Soviet economies into the global economy. This period also included the Asian crisis.

Today, there is no such crisis or structural deflationary shock comparable to that experienced in the late 1990s. Thus, the mounting deflation in world trade prices is signaling growing slack in the global economy.

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