April 2014

MODEST TRADE GROWTH FORECAST FOR 2014

But growth for next year is expected to improve.

By Kanaga Raja

Third World Network Features

            World trade is projected to see a modest growth of 4.7% in 2014 and to grow at a slightly faster pace of 5.3% next year, economists at the World Trade Organisation (WTO) have said.

            In its latest report on trade figures for 2013 and prospects for 2014 and 2015 released on 14 April, the WTO said that although the forecast of 4.7% growth in 2014 is more than double the 2.1% increase of last year, it remains below the 20-year average of 5.3%.

            WTO economists said that the trade forecast for 2014 is premised on an assumption of 3.0% growth in world GDP at market exchange rates, while the forecast for 2015 assumes output growth of 3.1%.

            "Risks to the trade forecast are still mostly on the downside, but there is some upside potential, particularly since trade in developed economies is starting from a low base," they said, however, cautioning that "volatility is likely to be a defining feature of 2014 as monetary policy in developed economies becomes less accommodative."

            They further said that some developed economy risk factors have receded considerably since last year, including the sovereign debt crisis in Europe and fiscal brinksmanship between the executive and legislative branches of government in the United States.

            "Developing economies are now the focus of several gathering risks, including large current account deficits (e. g. India, Turkey), currency crises (Argentina), overinvestment in productive capacity, and rebalancing economies to rely more on domestic consumption and less on external demand," said the economists.

            The geopolitical risks have introduced an additional element of uncertainty to the forecast, in that civil conflicts and territorial disputes in the Middle East, Asia and Eastern Europe could provoke higher energy prices and disrupt trade flows if they escalate.

            "However, since the timing and impact of these kinds of risks are inherently unpredictable, they are not considered directly in our forecasts," the WTO economists said.

            "For the last two years trade growth has been sluggish. Looking ahead, if GDP forecasts hold true, we expect a broad-based but modest upturn in 2014, and further consolidation of this growth in 2015," said WTO Director-General Roberto Azevedo in a press release.

            "It's clear that trade is going to improve as the world economy improves. But I know that just waiting for an automatic increase in trade will not be enough for WTO Members," he added.

            Azevedo advocated actively supporting trade growth by "updating the rules and reaching new trade agreements."

            "The deal in Bali last December illustrates this. Concluding the Doha round would provide a strong foundation for trade in the future, and a powerful stimulus in today's slow growth environment. We are currently discussing new ideas and new approaches which would help us to get the job done - and to do it quickly," he said.

            WTO economists attributed the "sluggish" pace of trade growth in 2013 to a combination of flat import demand in developed economies (-0.2%) and moderate import growth in developing economies (4.4%).

            On the export side, both developed and developing economies only managed to record small, positive increases (1.5% for developed economies, 3.3% for developing economies).

            According to the economists, the preliminary estimate of 2.1% for world trade growth in 2013 refers to the average of merchandise exports and imports in volume terms, i. e. adjusted to account for differences in inflation and exchange rates across countries.

            This figure is slightly lower than the WTO's most recent forecast of 2.5% for 2013, issued last September, and the main reason for the divergence, they said, was a stronger-than-expected decline in developing economies' trade flows in the second half of last year.

            For the second consecutive year, they reported, world trade has grown at roughly the same rate as world GDP at market exchange rates, rather than twice as fast, as is normally the case.

            Several factors contributed to the weakness of trade and output in 2013, including the lingering impact of the EU recession, high unemployment in euro area economies (Germany being a notable exception), and uncertainty about the timing of the Federal Reserve's winding down of its monetary stimulus in the United States.

            "The latter contributed to financial volatility in developing economies in the second half of 2013, particularly in certain ‘emerging' economies with large current account imbalances."

            The WTO also noted that recent business surveys and industrial production data point to a "firming up" of the recovery in the United States and Europe in early 2014. The gradual improvement of US employment data has allowed the Federal Reserve to proceed with its planned "tapering", of their third round of quantitative easing ("QE3").

            The outlook for the European Union has also improved, although growth there will remain uneven as long as peripheral EU economies continue to underperform core ones. Output growth in Japan should be slightly lower this year as planned fiscal consolidation is implemented.

            Finally, it said, despite having hit a soft patch recently, developing economies (including China) should continue to outpace developed economies in terms of GDP and trade growth in the coming year, but some could encounter setbacks, particularly those most exposed to the re-calibration of monetary policy in developed countries.

            Providing further perspectives on the 2014 trade forecast, the economists said that the WTO's forecast of 4.7% growth in world merchandise trade for 2014 is below the average rate of 5.3% for the last 20 years (1993-2013) and also below the pre-crisis average rate of 6.0% for 1990-2008.

            In addition to creating a permanent shift downward in the level of trade, the global recession of 2008-09 may have reduced its average growth rate as well. The average rate of trade expansion in the three years since 2010 is 3.2 percent.

            "Forecasts for 2014 and 2015, if correct, would raise the average to 4%, but this rate is insufficient to narrow the existing gap," the economists said.

            "The divergence between the pre-crisis trend and current levels of world trade continues to widen. This gap stood at 17.0% of the trend level in 2013 and will rise to 19% by 2014 if our projections are realised, which would place world trade further below its pre-crisis trend than it was in 2009 during what economists have called the ‘great trade collapse'."

            With respect to the state of the world economy and trade in 2013 and the first quarter of 2014, the WTO economists said that for developed economies taken together, GDP growth for the whole of 2013 was 1.1%, lower than the 1.3% rate recorded in 2012 and the 1.5% expansion of 2011.

            Developing economies' output slowed in 2013 as financial volatility hit some countries harder than others.

            Developing economies including the Commonwealth of Independent States (CIS) saw their collective GDP growth drop to 4.4% from 4.5% in 2012, down from 5.7% in 2011.

            "The rise in financial market volatility was most keenly felt in emerging markets with large current account deficits. This is especially true of India, where output growth see-sawed from 2.6% in the second quarter to 7.2% in the third, then back to 3.9% in the fourth (all rates annualized, sourced from the OECD)."

            The WTO economists also found that Asia recorded the fastest GDP growth among WTO geographic regions in 2013 at 4.2%, which was almost equal to growth in the previous two years.

            It was followed by Africa (3.8%), Middle East (3.0%), South and Central America (also 3.0%), the Commonwealth of Independent States (2.0%), North America (1.8%) and Europe (0.3%).

            World merchandise trade volume as measured by the average of exports and imports rose 2.1% in 2013, but the difference between measured exports and imports was relatively large (2.4% for exports, 1.8% for imports), said the WTO economists, adding that some degree of divergence between these figures is normal due to imperfect data recording and may be narrowed by future revisions.

            Exports of developed economies grew more slowly than the world average at 1.5%, while shipments from developing countries grew faster than average at 3.3%. On the import side, developed economies recorded a small decline of -0.2%, while developing economies and CIS increased by 4.4%.

            Asia's exports grew faster than any other region's last year, with a 4.6% rise. It was followed by North America (2.8%), Europe (1.5%), the Middle East (also 1.5%), South and Central America (0.7%), the Commonwealth of Independent States (also 0.7%) and Africa (-3.4%).

            Asia's export growth was held back by Japan, which saw its shipments to the rest of the world decline by 1.8%.

            Meanwhile, exports of China and India increased by 7.7% and 6.7%, respectively. These performances were better than 2012 but still relatively weak by recent historical standards.

            Turning to imports, the WTO economists said that the fastest growing region was Asia (4.4%), followed by the Middle East (4.4%), Africa (4.0%), South and Central America (2.5%), North America (1.2%), Europe (-0.5%), and the Commonwealth of Independent States (-1.1%).

            India suffered a sharp drop of 2.9% in its imports as a result of its economic slowdown, but China's purchases from abroad jumped nearly 10%.

            Africa was able to increase its imports even as its exports fell in 2013 due to continued high primary commodity prices. Although prices for metals, raw materials, and beverages (including coffee, tea and cocoa) have fallen in the last two years, oil prices have been remarkably steady, rising 1% in 2012 and falling 2% in 2013. Primary commodity prices in general only fell 2% last year.

            In value terms, the WTO economists reported that the dollar value of world merchandise exports in 2013 was $18.8 trillion, 2% higher than in 2012.

            Meanwhile, world commercial services exports in 2013 reached $4.6 trillion, with a growth rate of 6%. The 2013 growth rate for transport services was below world commercial services exports at 2%, while travel services grew at 7% and other commercial services grew at 6%.

            In dollar terms, China's exports of financial services rose 52% to $3 billion in 2013, although the United States remained the top supplier with exports valued at $82 billion. Other notable changes include China's displacing of France to become the fourth largest exporter of other business services.

            The WTO economists said that prospects for world trade and output in 2014 and 2015 are better than they have been for some time, but leading economies remain fragile, including some of the most dynamic developing countries that until recently were propping up global demand.

            "Downside risks to trade abound, but significant upside potential also exists, as the US economy seems to be gaining momentum and the European Union appears to have turned a corner. At the same time, developing economies have slowed appreciably, for a variety of reasons both internal and external. Which of these forces is stronger may determine how world trade evolves over the next 1 to 2 years."

            World merchandise trade is expected to post a 4.7% increase in 2014, with developed economies growing 3.6% and developing economies and the CIS advancing 6.4%.

            The WTO economists expect that exports from Asia will grow faster than those from any other region (6.9%). Asia should be followed by North America (4.6%), South and Central America (4.4%), Europe (3.3%), and other regions (3.1%), an aggregate that includes Africa, CIS and Middle East.

            On the import side, the 4.7% increase in world trade in 2014 will be split between developed economies growing at 3.4%, and developing economies growing at 6.3 percent. Asia should also lead all regions in import growth in 2014 (6.4%), followed by other regions (5.8%), South and Central America (4.1%), North America (3.9%), and finally Europe (3.2%). However, Asian import growth is likely to be unbalanced, with larger gains in China and smaller increases in other developing Asian economies.

            Merchandise trade is projected to grow by 5.3% in 2015, with developed and developing economies posting increases of 4.3% and 6.8%, respectively, on the export side, as well as gains of 3.9% and 7.1% on the import side.

            For the year, the WTO economists expect to see Asia's exports grow faster than in 2014 (7.2%), followed by those of South and Central America (5.5%), North America (4.5%), Europe (4.3%), and other regions (4.2%). In 2015, import growth of Asia should accelerate to 7.0%. Other regions will have the second fastest import growth (6.6%) followed by South and Central America (5.2%), North America (5.1%) and Europe (3.4%).

            "Trade growth this year could fall short of estimates if some downside risks emerge, including financial turbulence in emerging markets related to the conduct of monetary policy in the United States and other developed countries. Better than expected growth in the US could actually provoke further instability in developing economies as it might be interpreted as portending earlier interest rate rises."

            "This in turn could trigger further capital outflows from the developing world as investors seek improved returns in developed countries. However, the prospect of deflation in the euro area suggests that monetary policy in developed countries could as easily become looser rather than tighter," said the WTO economists. – Third World Network Features.

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About the author: Kanaga Raja is the Editor of the South-North Development Monitor (SUNS).

The above is an abridged version of an article which appeared in SUNS #7785, 15 April 2014

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