'WTO sees 9% global trade decline in 2009 as recession strikes'


According to the words of Director-General Pascal Lamy, "trade can prove to be a potent tool in lifting the world from the economic doldrums. In London G20 summit, 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".


As per the forecast of WTO economists, the collapse in global demand brought on by the biggest economic downturn in decades which will drive exports down by roughly 9% in volume terms in 2009, the biggest such contraction since the Second World War. The contraction in developed countries will be particularly severe with exports falling by 10%. In developed countries (which are considered to be far more dependent on trade for growth), exports will be shrink by 2% to 3%. 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. He further said that as a consequence, many thousands of trade related jobs are being lost. Governments should avoid making this bad situation worse by reverting to protectionist measures, which in reality protect no nation and threaten more number of job losses. We are carefully monitoring the trade policy developments. He commented on the usage of protectionist measures, which is on rise, and further risk is increasing of such measures that are choking off trade as an engine of recovery. The need of an hour is to be vigilant because the restrict imports only leads your partner to follow suit that hit exports. Trade can prove to be a patent as well as potential tool in lifting the world from economic doldrums.


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.


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


If this basic scenario holds, world merchandise trade is likely to fall some 9% in volume terms in 2009 (i.e., 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.

 

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 homeowners 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 can insulate itself from global downturn when most of it major trading partners are in recession. China's exports to its top six trading partners-considering the EU as a single partner- represented 70% of the country's total export in 2007. All of these trading partners are currently experiencing the contraction 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.


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.


 

Overview of trade and production developments in 2008


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 meager 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.


Source: AEPC Weekly