TWN Info Service on WTO and Trade Issues (Oct22/05)
7 October 2022
Third World Network

Trade: World trade to slow in 2023, as multiple shocks hit global economy
Published in SUNS #9662 dated 7 October 2022

Geneva, 6 Oct (Kanaga Raja) -- World merchandise trade in volume terms is expected to grow by 3.5% in 2022, slightly better than the 3.0% growth forecast earlier this April, according to the World Trade Organization (WTO).

In an update to their trade statistics, WTO economists, however, have forecast world merchandise trade volumes to increase by only 1.0% in 2023, down sharply from their previous estimate of 3.4% growth.

They said that trade and output will be weighed down by several related shocks, including the war in Ukraine, high energy prices, inflation, and monetary tightening.

According to the WTO economists, import demand is expected to soften as growth slows in major economies for different reasons. "In Europe, high energy prices stemming from the Russia-Ukraine war will squeeze household spending and raise manufacturing costs."

In the United States, monetary policy tightening will hit interest-sensitive spending in areas such as housing, motor vehicles and fixed investment, said the WTO.

It said China continues to grapple with COVID-19 outbreaks and production disruptions paired with weak external demand.

Finally, the WTO said, growing import bills for fuels, food and fertilizers could lead to food insecurity and debt distress in developing countries.

The WTO said that its new forecast estimates world GDP at market exchange rates will grow by 2.8% in 2022 and 2.3% in 2023 - the latter is 1.0 percentage points lower than what was previously projected.

In their April forecast, released only weeks after the start of the war in Ukraine, WTO economists said that they had to rely on simulations to generate reasonable growth assumptions, in the absence of hard data about the war's impact.

"As events have unfolded, the WTO's GDP projections for 2022 turned out to be broadly correct. The estimates for 2023, however, now appear overly optimistic, as energy prices have skyrocketed, inflation has become more broad-based, and the war shows no sign of letting up."

If the current forecast is realized, trade growth will slow sharply but remain positive in 2023, said the WTO, noting that there is a high degree of uncertainty associated with its forecast due to shifting monetary policy in the advanced economies and the unpredictable nature of the Russia-Ukraine war.

If current assumptions hold, the WTO said that trade growth in 2022 could end up between 2.0% and 4.9%.

"If the downside risks materialize, trade growth in 2023 could then be as low as -2.8%. If the surprises are on the upside, however, trade growth next year could be as high as 4.6%. Trade could also finish outside of these bounds if any of the underlying assumptions change," it added.

The Ukraine crisis has pushed up prices for primary commodities, particularly fuels, food, and fertilizers, it said.

"In August, energy prices were up 78% year-on-year, led by natural gas, which was up 250%. The 36% increase in the price of crude oil over the same period was small by comparison but still significant for consumers."

Natural gas prices have diverged strongly across regions, with European prices up 350% year-on-year in August, said the WTO.

US prices were up 120% in the same month but remained well below European levels (US$8.80 per million Btu compared to US$70.00 in Europe).

European demand for liquified natural gas (LNG) to supplement reduced supplies from the Russian Federation has also pushed up energy costs in Asia, where the price of LNG was up 87% in August, said the WTO.

"European gas prices have moderated recently, falling 34% between 31 August and 23 September, but they remain high by historical standards."

Oil prices have also receded from recent peaks, possibly indicating weaker global demand rather than an improved supply situation, said the WTO.

Food prices in US dollar terms have also risen sharply due to the fact that the Russian Federation and Ukraine are both major suppliers of grains and fertilizers, it added.

It said this raises food security concerns in many countries, particularly low-income ones that tend to spend a large fraction of household income on food.

Many currencies have also fallen against the dollar in recent months, making food and fuels even more expensive in national currency terms, the WTO added.

It said that global grain prices in August were up 15% year-on-year while wheat alone was up 18%, marking an improvement over April, when grains had increased 33% and wheat had risen 76%.

The WTO said potentially more worrying for the future are fertilizer prices, which were up 60% year-on-year in August after nearly tripling since 2020.

"Reduced fertilizer imports and use could reduce crop yields and increase food insecurity next year," it cautioned.

While the supply situation for grains may not be as dire as some had feared at the start of the Ukraine war, it is still a cause for concern, it added.

In July, the volume of traded wheat was down nearly 20% compared to March but only 4% year-on-year, said the WTO.

Underlying data suggest that some countries have responded to higher prices by reducing consumption and imports.

The WTO said that since March, quantities of imported wheat are down year-on-year in Bolivia (-69%), Jordan (-41%), Zambia (-38%), Nigeria (-37%), and Ecuador (-30%), among others.

The CIS (Commonwealth of Independent States) region suffered a strong 10.4% quarter-on quarter export decline in Q2 of 2022 as sanctions against the Russian Federation started to bite, it added.

Exports from South America, Africa and especially the Middle East beat expectations in the first half of the year, helping to make up for reduced shipments from the CIS region, while exports from North America, Europe and Asia in the first half of the year were broadly in line with expectations, said the WTO.

On the import side, the CIS region plunged 21.7% during the second quarter of 2022, probably as a result of the Russian Federation's exclusion from the SWIFT payments system, it added.

It said imports by other resource rich regions (South America, Africa and the Middle East) came in stronger than expected, as higher commodity prices inflated export revenues, allowing countries in these regions to import more. The WTO said North America and Europe recorded stronger than expected import growth in the first half of 2022 but Asian imports stagnated, registering year-on-year growth of just 0.7% in the first half.

The WTO said that its current forecast of 3.5% growth in the volume of world merchandise trade in 2022 is close to but slightly stronger than the previous estimate of 3.0% from last April, but the difference is mostly explained by statistical revisions and the availability of new data.

The Middle East is expected to record the strongest export growth of any WTO region this year (14.6%), followed by Africa (6.0%), North America (3.4%), Asia (2.9%), Europe (1.8%) and South America (1.6%). In contrast, CIS exports should decline by 5.8% for the year, it added.

The Middle East also had the fastest trade volume growth on the import side (11.1%), followed by North America (8.5%), Africa (7.2%), South America (5.9%), Europe (5.4%), Asia (0.9%) and CIS (-24.7%), said the WTO.

According to the WTO, the Middle East and Africa regions should see small declines in exports next year, but imports will remain strong, each set to grow by 5.7%.

The CIS region is expected to post a large growth rate for imports next year, over 9%, but if this happens it will be mostly due to the reduced base for 2022, while other regions can expect modest growth in both exports and imports in 2023, it said.

RISKS TO THE FORECAST

However, the WTO said that risks to the forecast are numerous and inter-related. Major central banks are already raising interest rates in a bid to tame inflation but overshooting on tightening could trigger recessions in some countries, which would weigh on imports, it said.

Alternatively, said the WTO, central banks might not do enough to bring inflation down, possibly necessitating stronger interventions in the future.

"High interest rates in advanced economies could trigger capital flight from emerging economies, unsettling global financial flows."

Escalation of the Russia-Ukraine war could also undermine business and consumer confidence and destabilize the global economy, said the WTO. It said that an under-appreciated risk would be the decoupling of major economies from global supply chains. This would exacerbate supply shortages in the near term and reduce productivity over the longer term.

In value terms, the WTO said that total merchandise trade was up 17% year-on-year in the second quarter of 2022, as compared to 22% year-on-year in the fourth quarter of 2021. "Trade in the first half of 2022 was also up 32% compared to 2019. The main takeaway is that because of changes in prices, merchandise trade values are growing at double digit rates even as trade growth in volume terms remains in the low single digits," it said.

As for commercial services trade, the WTO said that exports of travel and transport services rebounded strongly in many countries as pandemic-related restrictions have eased, but China is an exception, with travel spending held back by the country's zero-COVID policy.

Exports of other commercial services (a category that includes financial and business services) grew at a modest pace, partly due to the fact that they did not decline much during the pandemic, it added. +