The Pain Trade: How Slumping Commerce Threatens Global GrowthBy
Trade no longer growing twice as fast as economic expansion
WTO cuts trade forecast to 2.8% versus 5% average since 1995
The world’s biggest economies are finding it increasingly hard to trade their way out of trouble.
Once the grease of global growth, international commerce failed to rebound completely from the 2009 recession and now is slowing anew. Chinese exports tumbled 5.5 percent in August from a year earlier, while those of the U.S. fell 3.5 percent. South Korea and Singapore witnessed double digit declines.
Reflecting such weakness, the World Trade Organization this week cut its forecast for trade this year to 2.8 percent from 3.3 percent. It acknowledged its new prediction may be “over optimistic.”
Such rates fall short of the 5 percent average of the past two decades. Also gone are the 1990s and early 2000s when trade grew twice as fast as economic growth -- 2015 is set to be the fourth consecutive year in which the two expand around the same speed.
More worryingly, Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, points out that total world exports as of June were running below their year-ago levels at an annualized rate of $1.6 trillion, the equivalent to 2.1 percent of global gross domestic product.
That extended the decline in exports during the first six months of the year to 11 percent from the previous year, enough to fret about stagnation in the global economy given Weinberg’s estimate that there is a 70 percent correlation between expansion and export shifts.
“The contraction of world trade has yet to show a bottom,” said Weinberg. “This could be more than an economic headwind, it could be a tornado.”
The more-pessimistic outlook for commerce is likely one reason the International Monetary Fund is preparing to cut its 3.3 percent forecast for global growth this year when it holds its annual meetings in Lima next week.
Behind the latest deceleration in trade are the slowdown in China and fellow emerging markets, upheavals in commodity-rich nations and a rising dollar. Still, structural shifts are playing a part too as countries including U.S. and China rely on increased production at home and fewer trade deals are struck, suggesting globalization may have peaked.
There is some hope. Credit Suisse Group AG economists say that even though they are export-dependent, the euro-area and Japan have navigated the trade weakness well thanks to their production of high-tech goods and falling exchange rates. The WTO predicts an acceleration in trade next year to 3.9 percent.
A report by research firm Gavekal Dragonomics also suggested there may be a new phase of globalization led by services and innovative companies in the advanced nations rather than multinationals and eastern Asian economies.
Slice of Pie
Still, if trade does fail to pick up Adam Slater, an economist at Oxford Economics Ltd., predicts continued downward pressure on bond yields and renewed efforts by countries to devalue their way to prosperity.
“The temptation to try to grab a bigger slice of a given trade pie is likely to increase,” said Slater.
Just what that would achieve is in in doubt. The IMF this week suggested a 10 percent cheaper currency can boost exports by an average of 1.5 percent of GDP. By contrast, the World Bank recently estimated that falling currencies were only half as effective in increasing exports between 2004 and 2012 as they were in the prior eight years.
With emerging markets increasingly trading with each other it may be “the case that rather than the net outcome being a zero, the overall impact of currency depreciation may actually be a negative-sum game,” HSBC Holdings Plc economists Janet Henry and James Pomeroy said in a report this week.
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