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WTO: 9% global trade decline as recession strikes

Global Arab Network - - Maha Karim

Monday, 30 March 2009 23:21

The collapse in global demand brought on by the biggest economic downturn in decades will drive exports down by roughly 9% in volume terms1 in 2009, the biggest such contraction since the Second World War, WTO economists forecast today. The contraction in developed countries will be particularly severe with exports falling by 10% this year. In developing countries, which are far more dependent on trade for growth, exports will shrink by some 2%-3% in 2009, WTO economists say.

Economic contraction in most of the industrial world and steep export declines already posted in the early months of this year by most major economies — particularly those in Asia — makes for an unusually bleak 2009 trade assessment, said the WTO in its annual assessment of global trade.

Signs of the sharp deterioration in trade were evident in the latter part of 2008 as demand sagged and production slowed. Although world trade grew by 2% in volume terms for the whole of 2008 it tapered off in the last six months and was well down on the 6% volume increase posted in 2007.

“For the last 30 years trade has been an ever increasing part of economic activity, with trade growth often outpacing gains in output. Production for many products is sourced around the world so there is a multiplier effect — as demand falls sharply overall, trade will fall even further. The depleted pool of funds available for trade finance has contributed to the significant decline in trade flows, in particular in developing countries,” said Director-General Pascal Lamy.

“As a consequence, many thousands of trade related jobs are being lost. Governments must avoid making this bad situation worse by reverting to protectionist measures which in reality protect no nation and threaten the loss of more jobs. We are carefully monitoring trade policy developments. The use of protectionist measures is on the rise. The risk is increasing of such measures choking off trade as an engine of recovery. We must be vigilant because we know that restricting imports only leads your trade partner to follow suit and hit your exports. Trade can be a potent tool in lifting the world from these economic doldrums. In London G20 leaders will have a unique opportunity to unite in moving from pledges to action and refrain from any further protectionist measure which will render global recovery efforts less effective,” Mr. Lamy said.

Financial Crisis Sparks Downturn

Following the dramatic worsening of the financial crisis since September of last year, real global output growth slowed to 1.7%, compared to 3.5% in 2007, and is likely to fall by between 1% and 2% in 2009. This is the first decline in total world production since the 1930s, and its impact is magnified in trade. But WTO economists warn that the extraordinary turbulence of world markets in recent months and the continued uncertainty about the near-term trajectory of the global economy makes gauging the preliminary 2008 trade estimates and 2009 projections unusually difficult.

A notable aspect of the current slowdown in world trade is its synchronized nature. Monthly exports and imports of major developed and developing economies have been falling in unison since September 2008

With the growing share of developing countries’ trade in the global total, and increased geographical diversification of these flows, it was assumed by some commentators that a “decoupling” effect would have made developing countries less vulnerable to economic turmoil in developed countries. This has not turned out to be the case.

The WTO’s preliminary estimate of 2% growth in world trade volume for 2008 is substantially lower than the forecast of 4.5% growth issued a year ago. However, last year’s outlook did identify significant downside risks related to developments in financial markets. A large part of the explanation for the over-estimation was the unexpected and very sharp drop in global production in the fourth quarter of 2008.

Trade prospects for 2009

In projecting trade growth for 2009, we assume a normal pattern for a recession, where trade falls, remains weak for a time and then resumes its upward trajectory and begins to return to its previous trend. If this basic scenario holds, world merchandise trade is likely to fall some 9% in volume terms in 2009 (ie, where price changes have been removed from the calculation), with developed economy exports falling by some 10% on average and developing country exports shrinking by 2—3%.

Trade prospects for 2009 are heavily conditioned by the financial crisis that began almost two years ago in the United States. The crisis intensified dramatically following the collapse of the Wall Street investment bank Lehman Brothers in September of last year, and the government-led rescue of a number of financial institutions in the United States and elsewhere. Turmoil in the financial sector and acute credit shortages spread inexorably to the real sector. Declining asset prices, faltering demand and falling production translated into dramatically reduced and in some cases negative production and trade growth in many countries. Trade has also been affected adversely by a sharp shrinkage in credit to finance imports and exports.

Although the crisis began in the United States, financial institutions and economies throughout the developed and developing world have been severely affected. The deteriorating economic situation has taken a toll on both consumer and business confidence, and produced a negative feedback between the financial sector and the rest of the economy that dominates the outlook for 2009.

The months since last September have seen precipitous drops in global production and trade, first in the developed economies, then in developing ones as well. Indexes calculated by the Organization for Economic Cooperation and Development (OECD) of composite leading indicators for the major industrial economies have plunged to January 2009, indicating a high probability of a continuing decline in economic activity. Governments have tried a variety of policy measures to address the economic crisis, including bailouts for banks that are important for the economic and financial system, and, more recently, mortgage assistance for struggling home owners in the United States. All of this is in addition to monetary and fiscal policies that have been deployed since the start of the crisis. Conventional monetary policy may be reaching the limits of its effectiveness, with interest rates in the United States and elsewhere approaching zero. The timing of the recovery may now depend on how effective are proposed fiscal stimulus plans, which currently amount to more than 3% of world production.

Since the recession began to take hold in the fourth quarter of 2008 there has been little cause for optimism in the outlook for trade in 2009. The financial crisis has disrupted the normal functioning of the banking system and deprived firms and individuals of much-needed credit. Falling stock markets and housing prices have also administered negative shocks to wealth in the United States and elsewhere, making households unwilling to purchase durable goods such as automobiles while they attempt to rebuild their savings. Falling commodity prices, while a boon to consumers in importing countries, have also deprived oil-producing countries of export revenues.

Not even China, with its dynamic economy, can insulate itself from global downturn when most of its main trading partners are in recession. China’s exports to its top six trading partners (treating the EU as a single partner) represented 70% of the country’s total exports in 2007. All of these trading partners are currently experiencing economic contraction or slowdown and are likely to exhibit weak import demand for some time.

Available monthly data for most major traders show large drops in merchandise exports and imports through the first two months of 2009. An exception to this pattern of decline in trade flows is discernible for certain economies in Asia, where positive monthly import growth numbers were recorded for China (17 per cent) and also for Singapore, Chinese Taipei and Vietnam. While this is only a single month of data, and should therefore be interpreted cautiously, it could be evidence of slowing decline and perhaps a “bottoming out” of negative trade growth trends. Future trade growth will, of course, depend on what happens to demand elsewhere in the world economy.

Moreover, the question must be asked as to how far trade could conceivably fall in the months ahead. As an example, consider China’s exports. In February these were down 26% compared with the same month in the previous year and 28% compared with January. If one were to extrapolate this downturn, China’s exports would be approaching zero within ten months to a year. This is obviously a highly implausible scenario and emphasizes the reality that such steep declines as those we have witnessed recently will not persist.

The above estimates of trade growth are supported by the results of the WTO Secretariat’s time series forecasting model which predicts for developed countries (more precisely, members of the Organization for Economic Cooperation and Development or OECD), a slow-down in imports of goods and services of some 8.5% (technically, “on a balance-of-payments basis”)

The estimates are sensitive to the size of the initial drop and to the rate of recovery. If the drop in world trade is deeper than expected or if recovery happens more quickly, then the growth forecast will need updating.

Despite the large size of this expected drop in world trade there are still substantial downside risks to the projection. Further adverse developments in financial markets could prolong the current crisis, as could a surge in protection. Recovery could be slower than expected if household consumption does not return to a more normal growth trend soon.

On the other hand, growth could resume more quickly than expected if reforms to the financial sector are implemented quickly and credit markets begin to function more normally. Recessions usually contain the seeds of their own recovery, as reduced consumption implies increased savings, which is then lent out to willing borrowers for investment in future production. Unfortunately, this channel of recovery may be blocked until the world’s banking sector is repaired.

Reasons for trade contraction

Trade growth data show declines that are larger than in past slow-downs. A number of factors may explain this.

One is that the fall-off in demand is more widespread than in the past, as all regions of the world economy are slowing at once.

A second reason for the magnitude of recent declines relates to the increasing presence of global supply chains in total trade. Trade contraction or expansion is no longer simply a question of changes in trade flows between a producing country and a consuming country — goods cross many frontiers during the production process and components in the final product are counted every time they cross a frontier. The only way of avoiding this effect — whose aggregate magnitude can only be guessed at on account of the absence of systematic information — would be to measure trade transactions on the basis of the value added at each stage of the production process. Since value-added, or the return to factors of production, is the real measure of income in the economy, and trade is a gross flow rather than a measure of income, it follows from the reasoning above that strong increases or decreases in trade flow numbers should not be interpreted as an accurate guide to what is actually happening to incomes and employment.

A third element in current conditions that is likely to contribute to the contraction of trade is a shortage of trade finance. This has clearly been a problem and it is receiving particular attention from international institutions and governments. The WTO has been playing a role as honest broker by bringing together the key players to work on ensuring the availability and affordability of trade finance.

A fourth factor that could contribute to trade contraction is protection. Any rises in protection will threaten the prospects for recovery and prolong the downturn. The risk of aggravated protectionism is rightly a source of concern going forward.2

Economic growth

World economic growth — measured by total production, or gross domestic product (GDP) — slowed abruptly in 2008 against the backdrop of the worst financial crisis since the 1930s. Weaker demand in developed economies brought about by falling asset prices and increased economic uncertainty helped pull world output growth down to 1.7%, from 3.5% a year earlier. Growth in 2008 was the slowest since 2001 and well below the 10 year average rate of 2.9%.

Developed economies only managed a meagre 0.8% growth during last year, compared to 2.5% in 2007, and an average rate of 2.2% between 2000 and 2008. Developing economies, on the other hand, expanded their output in 2008 by 5.6%, down from 7.5% in 2007, but still equal to their average rate for the 2000—08 period.

Oil exporting countries experienced rapid growth of 5.5% on average in 2008, with exports from the Middle East growing at an even faster rate of 6.3%.

Least-developed countries (LDCs) grew faster than any other group of countries, at 6.6%, and above their 2000—08 average rate of 6.3%.

Europe and North America each grew only about 1% in 2008, while the oil exporting regions of South and Central America, the Commonwealth of Independent States, Africa and the Middle East all experienced GDP growth in excess of 5%.

Asia’s economic growth (GDP) in 2008 was only 2%, owing in large measure to the negative growth (—0.7%) recorded by Japan. By contrast, developing Asia (excluding Japan, Australia and New Zealand) grew 5.7%, led by China, which registered the fastest growth of any major economy, at 9.0%.

The overall picture was one of continuing growth in the first half of the year, with oil exporting countries in particular benefiting from record high commodity prices. This was followed by faltering growth and the beginnings of a severe downturn in the second half, starting in the United States and other developed countries, and then spreading to developing countries.

Exchange rates and commodity prices

The value of the US dollar against a broad group of currencies — that is, its real effective exchange rate — rose during 2008 as the United States currency strengthened against those of its trading partners. The rise of the dollar followed a weakening against other currencies since 2002. The 2008 appreciation was most pronounced in the second half of the year as the financial crisis intensified. A strengthened dollar appears in large measure to be the result of a flight to cash in a perceived “safe haven” currency. This may also explain the strengthened yen (see below).

In the first half of 2008 the euro rose 7% against the dollar and then fell 14% from July to December. The euro had previously gained 30% against the dollar between January 2006 and its peak in July 2008. The British pound, the Canadian dollar and the Korean won all displayed similar trends, falling sharply against the dollar in the second half of 2008, after a long period of appreciation.

The Japanese yen and Chinese yuan behaved differently in response to the financial crisis. Both had appreciated against the dollar in recent years. As the financial crisis took hold, the yen rose sharply against the dollar while the yuan has remained more or less constant.

Prices for primary commodities were highly volatile in 2008, which is one of the main reasons why trade performance in the second half of the year was so different from the first half. After steadily rising throughout 2007, energy prices spiked to record highs at over $140 a barrel by mid-year, only to crash afterwards to the lowest level since early 2005 amid weakening demand in oil importing countries. Between January 2007 and July 2008 fuel prices rose 144%, more than doubling. But from July until the end of 2008 they fell 63%

Prices for other primary products, including metals and food, have also fallen from their peaks earlier in 2008. Inflationary pressures remain in check in most countries due to weaker demand for goods worldwide, and deflation may be a greater risk in some countries in the short term.

Trade

Merchandise trade growth in real terms (i.e. adjusted to discount changes in prices) slowed significantly in 2008 to 2%, compared to 6% in 2007. But trade still managed to grow faster than global output, as is usually the case when production growth is positive. Conversely, when output growth is declining trade growth tends to fall even faster, as we are now witnessing.

In dollar terms (which includes price changes and exchange rate fluctuations), world merchandise exports increased by 15% in 2008, to $15.8 trillion, while exports of commercial services rose 11% to $3.7 trillion.

The share of developing economies in world merchandise trade set new records in 2008, with exports rising to 38% of the world total and imports increasing to 34%.

Germany’s merchandise exports in 2008, at $1.47 trillion, were slightly larger than China’s $1.43 trillion. This meant that Germany retained its position as the world’s leading merchandise exporter.

Despite its strong overall trade performance, China’s exports in some product categories faltered towards the end of the year. Exports of office and telecom equipment to the rest of the world, worth some $381.5 billion in 2008, fell 7% in the fourth quarter compared to the same period of the previous year, after growing at an average rate of 17% during the first three quarters. Exports of office and telecom equipment to the United States fell even more sharply, registering a 13% decline in the fourth quarter after growth of 10% in the third quarter. Overall, exports of Chinese manufactured goods to the United States increased just 1% over the previous year, after growth of 14% in the third quarter.

One of the sectors hardest hit by the global recession has been the automobile industry. Japan’s exports of automotive products to the rest of the world fell by 18%, while exports to the United States dropped by 30% in the fourth quarter of 2008. According to the European Automobile Manufacturers Association (ACEA), passenger car registrations were down 18% in Europe in February 2009, compared to the previous year. The new EU member states of Eastern Europe were hardest hit, with a drop of 30%, while Germany was a conspicuous exception with an increase of nearly 22%. Sales in Germany were boosted by a 2,500 euro “scrapping bonus” provided by the German government to customers who replaced an older vehicle with a new one. The scheme is intended to at least partly counteract slumping foreign sales of German cars. According to the German industry association Verband der Automobilindustrie (VDA), the number of vehicles exported in February 2009 fell 51% over the previous year, while the volume of imports was down 47%. Autodata Corp. also reports a 41% decline in American automobile sales in February 2009.

As with merchandise exports, commercial services exports for which data were available fell in the fourth quarter of 2008 compared with the previous year — albeit less so (7—8%) than merchandise (12%). For the year as a whole, commercial services exports grew more slowly than goods exports (on a balance of payments basis), rising by 11% compared with 15% for goods. Exports of transport services rose 15% in 2008 while travel services and other commercial services both increased 10%. The United States remained the largest exporter and importer of commercial services, with exports of $522 billion and imports of $364 billion.

One indicator of the severity of the global downturn in trade has been the fall-off in international shipping. According to the International Air Transport Association (IATA), air cargo traffic was down 23% in December 2008 compared to a year earlier, led by a strong decline of 26% in the Asia-Pacific region. To give some perspective on the magnitude of this drop, the decline recorded in September 2001, when most of the world’s aircraft were temporarily grounded, was only 14%.

Another measure that has received a lot of attention recently is the Baltic Dry Index, a measure of the cost of shipping bulk cargo by sea, published by the Baltic Exchange in London, the leading world marketplace for brokering shipping contracts. Movements in the index can be tracked to global demand for manufactured goods. Between June and November of 2008 the Baltic Dry Index fell by 94%.

Annual trade figures in dollar terms were strongly influenced by changes in commodity prices and exchange rates in 2008. Despite the fact that fuel prices ended 2008 at a lower level than at any point in 2007, average prices for 2008 were about 40% higher than 2007, which tended to raise total merchandise imports for most countries. For example, United States merchandise imports grew 7% in 2008, but non-fuel imports only increased by 1%. Prices for food and beverages have also receded from their peaks of last year.

Merchandise trade in volume terms (excluding the price and exchange rate fluctuations) expanded by 2% in 2008, down from 6% in 2007. Growth for the year was below the average 5.7% registered during the 1998-08 period. Trade growth was very close to GDP growth in 2008, compared to earlier years when trade growth exceeded GDP. It is likely to be below GDP growth next year

South and Central America saw exports expand by 1.5% and imports grow by 15.5%. Import growth was faster than that of any other region.

Imports grew faster than GDP while export volume lagged behind output.

The region with the fastest export volume growth in 2008 was the Commonwealth of Independent States (CIS — a group of former Soviet Union states), which recorded a 6% increase compared to 2007. The region also had the second highest import growth compared to any other, with a 15% expansion over the previous year.

Both export and import volumes for the Middle East were down sharply in 2008, falling to 3% from 4% in 2007 for exports, and to 10% from 14% for imports.

The growth of Africa’s exports and imports also slowed in 2008, falling from 4.5% in 2007 to 3% in 2008 on the export side, and from 14% in 2007 to 13% on the import side.

Global Arab Network

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Last Updated on Saturday, 18 April 2009 20:37

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