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Cautions on world trade cycle statistics

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WASHINGTON - January 31, 2019

Given the ongoing change in the trade cycle, the world economy is also changing. But now we see a new turn. With global trade growth decelerating sharply after the global financial crisis of 2008-2009, the protectionism surge and the break in global production chains have intensified the challenges. There is a distinct possibility that a reversal in an already weak trade cycle could trigger an unexpectedly rapid deterioration in the global economy.

The January issue of the World Economic Outlook of the International Monetary Fund shows several first signs of this development. According to it, the IMF revised its forecast for world GDP growth by 0.2 percentage points (from 3.7% to 3.5%), but lowered its forecast for world trade growth by only a fraction of a percent, leaving it at 4%.

This, of course, is puzzling. Given the increase in duties in trade between the United States and China and threats of their further increase, and also associated with Brexit risks for trading in the Eurozone, there is a strong case for a more significant revision downward of the prospects for world trade.

This can cause serious problems, as the support for the global economy provided by global trade is already quite fragile. After the crisis-induced decline of 10.4% in 2009 (a record in recent history), world trade volumes recovered sluggishly. After a short two year period of rebound in 2010-2011, the pace of world trade growth averaged only 3.6% in the period from 2012 to 2018. This is about half of the average annual growth rate in the 20 years before the crisis-7.1%.

Yes, of course, the slowdown in world trade can be attributed to a relatively weak recovery after the crisis. However, the correlation between the growth rate of world trade and the growth rate of world GDP (this indicator is normalized for different trajectories of economic recovery) shows otherwise. During the two previous periods of economic recovery, 1985-1990 and 2002-2007, the rate averaged 1.6. In other words, as soon as the cyclical noise of the rebound after the recession subsides, world trade grows about 60% faster than world GDP. On the contrary, during the current economic recovery, the average ratio was only 1.0 for the comparable period 2012-2018: the growth rate of global trade slowed and became equal to the growth rate of world GDP.

 

There is a heated debate about why world trade has slowed so sharply in recent years. A detailed IMF study published at the end of 2016 explains this slowdown primarily due to low business capital expenditure and notes only a minor impact of protectionism. But in the next two years, the world changed a lot. Lack of capital costs saved (despite their temporary increase, due to the significant tax cuts in countries such as, for example, the USA), but at the same time there was significantly increasing protectionism and the concomitant negative pressure on the global production chain. This means that it is time to reconsider the IMF's findings.

The administration of President Trump is clearly leading the way from trade liberalization and globalization to protectionism and fragmentation. One phrase from Trump’s inaugural speech says a lot: "Protectionism will lead to increased prosperity and strength." Words quickly gave way to business. There soon followed the US’s exit from the TRANS-Pacific partnership, the replacement of NAFTA with the more expensive USMCA (United States–Mexico–Canada Agreement) and, of course, a series of duty increases against China. The withdrawal from the Paris Agreement on Climate Change, the threat to withdraw from the World Trade Organization, and complaints about NATO participation indicate the US’s desire to withdraw from the system of multilateral relations (multilateralism) and the world trade system, which they have long supported.

Against this background, China's accelerating economic slowdown is becoming particularly problematic. The latest GDP data shows only a slight slowdown at the end of 2018 -- in the fourth quarter, the annual growth rate was 6.4% compared to 6.5% in the third quarter. However, the monthly statistics show that in December there was a sharp decline in retail sales of key consumer durables such as cars and mobile phones. As domestic demand declined, Chinese imports fell 7.6% in the 12 months ended December. This is an alarming change of trends: in 2017, imports grew by 16.1%. At the same time, exports from China fell by 4.4% in December, as the decline in sales in the US markets caused by the introduction of duties finally had a serious impact.

Needless to say, depending on the outcome of the US-China trade negotiations, there may be new bad news for Chinese exports to the USA. In addition, despite China's active measures to overcome the cyclical decline in domestic activity, it will probably take several months before these steps begin to have any effect. Meanwhile, there remain serious downside risks for the Chinese import demand. All of this highlights the main risk for the IMF's latest forecasts: China is the world's largest exporter and the world's second largest importer. The negative impact of China on the already weak cycle in world trade is only beginning to become apparent.

The devastating Brexit effect can only exacerbate this problem. The Eurozone countries, taken as a whole, immediately follow China in the ranking of global exporters and slightly above China with its second place among the largest importers. Exports to the UK account for about 3% of the EU's GDP (Belgium, Ireland and the Netherlands have a much higher figure), so the difficulties caused by Brexit in global trade can hardly be regarded as something insignificant.

In general, in the global trading cycle in 2019, a very large stress is coming, and the indicators decline has just begun. All this highlights the risks of a significant decline in global GDP growth. The world is still closely connected, so no major country can be an oasis. This applies also to the US, whose 45th President continues to insist that winning a trade war is easy. Or maybe not.

Author: USA Really