The World Trade Organization (WTO) has downgraded its outlook for global trade this year and next, citing tighter credit market conditions and escalating trade tensions as the main drivers. Outlook has been cut by 11.4 percent from 4.4 percent to 3.9 percent in 2018 and down 7.5 percent to 3.7 percent in 2019.
The WTO states that developing and emerging economies could experience capital outflows and financial contagion as developed countries raise interest rates, with negative consequences for trade. Geopolitical tensions could threaten resource supplies and upset production networks in certain regions.
‘While trade growth remains strong, this downgrade reflects the heightened tensions that we are seeing between major trading partners,’ said WTO Director General Roberto Azevêdo.
Structural factors such as the re-balancing of the Chinese economy away from investment and toward consumption are still present and could weigh on import demand due to the high import content of investment. Overall, risks to the forecast are considerable and heavily weighted to the downside, the report states.
Monetary policy tightening in developed economies has also contributed to volatility in exchange rates and may continue to do so in the coming months, further tightening access to credit in key investment regions and for global trade.
The downward revision to the trade forecast is consistent with the WTO’s World Trade Outlook Indicator (WTOI), which has signaled slowing trade momentum since the first quarter of 2018. The WTOI combines several leading indicators for trade into a single composite indicator. Components include container port throughput, air freight shipments, export orders, automobile sales and trade in electronic components and raw materials. The export orders component, derived from purchasing mangers’ indices, has fallen from 54.1 in January to 50.3 in August, just above the baseline value of 50.0 separating expansion from contraction.
The WTO also employs a separate indicator to measure economic policy uncertainty.
The Index is based on the frequency of keywords related to uncertainty in press reports and rose from 113 to 227 between January and July before falling back to 205 in August. Although uncertainty has eased slightly recently, it remains higher than during the global financial crisis of 2008, says the report. To the extent that economic uncertainty deters investment it can have a negative impact on trade since capital goods tend to have high import content.
Director General Azevêdo adds, ‘More than ever, it is critical for governments to work through their differences and show restraint.’
The revised trade outlook is based on expectations of world GDP growth at 3.1 percent in 2018 and 2.9 percent in 2019. The revised trade outlook at 4.4 percent and 4 percent respectively implies a ratio of trade growth to GDP growth of 1.3 in 2018 and 2019.