Over the past several years, whenever we have looked at the IMF’s global growth forecasts, the only chart we said is worth keeping an eye on, is that of global trade, because while GDP can be massaged, retroactively revised, and “double-seasonally adjusted” when the need arises – and is far more a political “metric” than an economic one – trade remains the most objective indicator of how the world is truly doing at any given moment, especially since “central banks can’t print trade.”
In fact, it has been our contention for several years now that the single best indicator of the global economy is the rate of growth in global trade, which unfortunately has been slowing for the past 5 years.
Making matters worse, according to a new update from the World Trade Organization, global trade is now set to grow at the slowest pace since the financial crisis. In a report issued today, the WTO said that world trade will again grow more slowly than expected in 2016, expanding by just 1.7%, well below the April forecast of 2.8%.
The forecast for 2017 was also slashed, with trade now expected to grow between 1.8% and 3.1%, down from 3.6% previously. With expected global GDP growth of 2.2% in 2016, this year would mark the slowest pace of trade and output growth since the financial crisis of 2009.
Merchandise trade volume and real GDP, 2012-2017 a
Volume of merchandise exports and imports by region, 2012Q1-2016Q2
Volume of merchandise exports and imports by level of development, 2012Q1-2016Q2
If the revised projection holds (if anything, it may be revised further downward), 2016 will be the first time in 15 years that the ratio between trade growth and world GDP has fallen below 1:1.
Ratio of world merchandise trade volume growth to world real GDP growth, 1981-2016
Redundantly, the WTO adds that “historically strong trade growth has been a sign of strong economic growth, as trade has provided a way for developing and emerging economies to grow quickly, and strong import growth has been associated with faster growth in developed countries. However the increase of the number of systematically important trading countries and the shift in the ratio of trade and GDP growth makes it more difficult to forecast future trade growth. Therefore, the WTO is for the first time providing a range of scenarios for its 2017 trade forecast rather than giving specific figures. As Chart 1 below shows, the current trend in the relationship between trade growth and world GDP is lower than observed over the last three decades.”
The ongoing collapse in world trade will likely get even worse in coming months, especially if as a result of the ongoing Europe backlash against the TPP, Obama’s trade agreement fails to pass.
As the WTO admits, the latest figures are a disappointing development and underline a recent weakening in the relationship between trade and GDP growth. Over the long term trade has typically grown at 1.5 times faster than GDP, though in the 1990s world merchandise trade volume grew about twice as fast as world real GDP at market exchange rates. In recent years however, the ratio has slipped towards 1:1, below both the peak of the 1990’s and the long-term average.
Needless to say, WTO director general Robert Azevedo was shocked by this dramatic trade slowdown:
“The dramatic slowing of trade growth is serious and should serve as a wake-up call. It is particularly concerning in the context of growing anti-globalization sentiment. We need to make sure that this does not translate into misguided policies that could make the situation much worse, not only from the perspective of trade but also for job creation and economic growth and development which are so closely linked to an open trading system.
“While the benefits of trade are clear, it is also clear that they need to be shared more widely. We should seek to build a more inclusive trading system that goes further to support poorer countries to take part and benefit, as well as entrepreneurs, small companies, and marginalised groups in all economies. This is a moment to heed the lessons of history and re-commit to openness in trade, which can help to spur economic growth.”
The WTO’s appeal to “revise” globalization echoes a similar call made by the IMF, although it is difficult to see how such a transformation could take place. That said, the IMF recently took a pot shot at none other than Donald Trump for his protectionist agenda, when she said that “Those who promote ‘getting tough’ with foreign trade partners through punitive tariffs should think carefully”, said the IMF’s Maurice Obstfeld earlier in September. “It may be emotionally gratifying; it may boost specific industries; the threat may even frighten trade partners into changing their policies; but, ultimately, if carried out, such policies cause wider economic damage at home,” he said.
Looking at the collapse in global trade under the existing “non-protectionist” paradigm, the damage has already been done.
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