Downward revision is due to slowdown in China and falling levels of U.S. imports
The World Trade Organization (WTO) has revised downwards its forecast for global trade growth in 2016 to 1.7% from the earlier estimate of 2.8% in April 2016, on Tuesday, September 27th, 2016. The downward revision is mainly on account of a slowdown in China and falling levels of U.S. imports, marking the first time in 15 years that global trade is expected to lag behind global GDP growth. 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.
WTO Director-General Roberto Azevedo said:
The figures should be a wake-up call for governments. 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.
The downgrade follows a sharper-than-expected decline in merchandise trade volumes in Q1 FY16 (-1.1% Q-o-Q, as measured by the average of seasonally-adjusted exports and imports) and a smaller-than-anticipated rebound in Q2 FY16 (+0.3%). The decline was driven by slowing GDP and trade growth in China, Brazil, and North America, which reported the strongest import growth in 2014-15, but has decelerated since then.
Weakening relationship between trade and GDP growth
The downward revision in the WTO’s forecast for global trade growth for 2016 signifies the weakening relationship between trade and GDP growth. Over the long-term, trade has typically grown at 1.5x faster than GDP; however, in recent years, the ratio has slipped towards 1:1, below both the peak of the 1990s and the long-term average. With the recent WTO revised projection, 2016 will be the first time in 15 years that the ratio between trade growth and world GDP has fallen below 1:1. The data shows that, after a long period of growth through globalization and reliance on global trade, governments are increasingly seeking to protect their own industries and promote domestic producers at the expense of foreign competitors.
Historically, trade growth has been a sign of robust economic growth; however, the increase of the number of major 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.
In 2016, trade is expected to grow only 80% as fast as the global GDP growth, according to the WTO, signifying a first reversal of globalization since 2001 and only the second since 1982. Azevedo said four out of five job losses in industrialized nations were not due to competition from cheaper imports, but due to automation and efficiency that allowed firms to cut their workforce.
Trade trends by level of development
Since WTO issued the global trade growth forecast for 2016 in April 2016, the global economy has faced headwinds in the form of financial turbulence in China and other developing market economies early in the year. The recent movements in trade by level of development shows seasonally-adjusted quarterly merchandise trade indices in volume terms.
Import demand of developing economies fell 3.2% in Q1 FY16, before recovering to 1.5% in Q2 FY16. Meanwhile, developed economies recorded positive import growth of 0.8% in Q1 FY16 and negative growth of -0.8% in Q2 FY16. Overall, global imports stagnated in H1 FY16, falling 1.0% in Q1 FY16 and rising 0.2% in Q2 FY16, translating into weak demand for exports in both developed and developing economies. For the year-to-date, global trade has remained flat, with the average of exports and imports in Q1 FY16 and Q2 FY16 declining 0.3% versus FY15.
Outlook for H2 FY16 and 2017
The WTO also said that while trade is expected to pick up in H2 FY16, the pace of expansion is likely to remain subdued due to a number of uncertainties, including financial volatility stemming from changes in monetary policy in developed countries and the potential effects of the Brexit vote in the U.K., which has increased uncertainty about future trading arrangements in Europe, a region where trade growth has been relatively strong.
Most notably, the outlook for H2 FY16 and 2017 are dependent on the changes in dollar value and certain commodities such as oil. In 2015, merchandise trade volumes continued to grow slowly despite a sharp 14% decline in the dollar value of world trade, largely due to the appreciation of the U.S. dollar. However, in H1 FY16, a depreciation of the greenback had an inverse effect on values of traded goods, particularly dollar-denominated commodities such as oil. If this trend continues for the remainder of the year, world merchandise trade growth in dollar terms could exceed trade growth in volume terms in 2016.
For 2017, the WTO has also revised downwards its forecast for world trade growth to 1.8% to 3.1%, from 3.6% estimated in April 2016.