CFOs worried about the impact of a weakening US dollar on trade, debt and GDP growth do not need to fret so much, if they consider the analysis of Oxford Economics as sound. In a new report, the advisory firm concludes that the weakening of the US dollar over the past year "may add over 3% to the level of world trade over and above the boost coming from world GDP growth."
Analyst Gabriel Sterne expects further declines in the greenback. Oxford Economics' view is that the recent depreciation of the dollar is a response to both overvaluation and growth catch-up by the rest of the world. "We expect the dollar to weaken further once current market turmoil abates," he writes.
Impact on Global Trade
Sterne also reaffirms his baseline forecast for 5% growth in world trade in 2018, "with risk likely skewed to the upside thanks to the boost from the dollar weakness." He cites recent reseach that finds a 1% depreciation in the US currency leads to a 0.6%-0.8% increase within a year in the volume of trade between countries, as dollar-denominated imports become cheaper.
Sterne also argues that "falls in the value of the dollar oil the wheels of the global financial system" because a weaker dollar enhances global liquidity by strenghtening balance sheets and alleviating currency mismatches. The differential between the cost of raising dollars onshore and offshore is reduced, which increases cross-border lending and provides a boost to bank equities.
Emerging Markets the Winners
Emerging economies stand to gain the most in this scenario, Sterne believes. The dollar-denominated debt of non-bank companies in emerging markets stood at US$3.5 trillion in 2017, equivalent to 14% of combined EM GDP. "The impact of dollar-weakening from Q1 2017 will have lifted a weight from EM balance sheets and credit conditions more generally," Sterne reckons.
Significant gainers, according to the report, includce Indonesia, India, the Philippines and Malaysia.
What's the impact of a weak dollar on US GDP? "The seven-year link between dollar strength and US recovery (2009-16) now appears broken, and we think it will remain so, with relatively strong US growth and a weakening dollar providing a significant boost to global activity," says Sterne.