Trade to remain subdued in 2013 as European economies continue to struggle: WTO

 

According to World Trade Organization (WTO), world trade growth fell to 2% in 2012— down from 5.2% in 2011— and is expected to remain sluggish in 2013 at around 3.3% as the economic slowdown in Europe continues to suppress global import demand.

 

Issuing a statement that threat of protectionism was greater now than at any time since the start of global economic crisis, WTO warned that as long as global economic weakness persists, protectionist pressure will build and could eventually become overwhelming. WTO figures show that world trade growth fell to 2% in 2012- down from 5.2% in 2011, and is expected to remain sluggish in 2013 at around 3.3% as the economic slowdown in Europe continues to suppress global import demand.

The abrupt deceleration of trade in 2012 was attributed to slow growth in developed economies and recurring bouts of uncertainty over the future of the euro. Flagging output and high unemployment in developed countries reduced imports and fed through to a lower pace of export growth in both developed and developing economies. The statement said that improved economic prospects for the US in 2013 should only partly offset the continued weakness in the EU, whose economy is expected to remain flat or even contract slightly this year. China ’s growth is expected to continue to outpace other leading economies, cushioning the slowdown, but exports will still be constrained by weak demand in Europe . As a result, 2013 looks to be a near repeat of 2012, with both trade and output expanding slowly, below their long-term average rates.

In 2012, the dollar value of world merchandise exports only increased by 0.2% to US$18.3 trillion, leaving it essentially unchanged. The slower growth in the dollar value of world trade compared to trade in volume terms is explained by falling prices for traded goods. Some of the biggest price declines were recorded for commodities such as coffee (–22 %), cotton (–42%), iron ore (–23%) and coal (–21%), according to IMF commodity price statistics.

The value of world commercial services exports rose just 2% in 2012 to US$4.3 trillion, with strong differences in growth rates across countries and regions. For example, the US saw its exports of commercial services climb 4% while those of Germany dropped 2% and France ’s tumbled 7%. On the import side, several European countries recorded sharp declines, including Italy (–8%), France (–10%), Portugal (–16%) and Greece (–18%).

The trade forecast for 2013 assumes 2.1% growth in world output at market exchange rates (unchanged from 2012) based on a consensus of economic forecasters. Risks to the forecast are firmly rooted on the downside and are mostly linked to the sovereign debt crisis in Europe .

Accelerated fiscal consolidation in the US could also undermine the forecast if brinksmanship over budget negotiations between the executive and legislative branches leads to miscalculation. As always, unexpected events such as geopolitical tensions and natural disasters could also intrude to disrupt trade. On a more positive note, some factors that held back trade growth in 2012 may subside in 2013, including the recent territorial dispute that soured trade relations between Japan and China .

Indicators of production, business sentiment and employment in the first quarter of 2013 paint a mixed picture of current economic conditions. Purchasing managers’ indices suggest that the euro-zone downturn may have accelerated despite continued resilience in Germany . At the same time, the US recorded a strong rise in manufacturing, Japan ’s production growth was less negative, and China and the Republic of Korea showed modest improvements.

Unemployment in the US recently fell to its lowest level since before the economic crisis at 7.6%, whereas the rate for the euro area stands at close to 12%. Together, these indicators point to weak import demand in Europe even as conditions gradually improve elsewhere. In light of the large weight of the EU in world imports (32% in 2012 including trade within the EU, 15% excluding it), this suggests slow growth for trade in the early part of 2013.

Warm regards,

 

Dr. S P Sharma

Chief Economist