Macroscan. The limping growth in global goods and services trade

This year, the voices from Davos, Switzerland, were all upbeat about the world economy. This is not new: for some time now, notwithstanding the gloomy reality, leaders of major countries, along with representatives of large international organisations, have been trying to “talk up” the economy — both of individual countries or for the world as a whole.

Ever since the Great Recession of 2008-09 put a brake on the rapid growth experienced in the previous decade, they have been supposedly observing the “green shoots” of economic recovery, even when these shoots withered before they could grow into anything worthwhile.

Every slight rise in the halting rate of economic expansion was hailed as the way out of the secular stagnation that global capitalism has been mired in, only for that promise to fade away as it turned out that insufficient demand would continue to ensure slow growth.

But this time there is a new confidence, based on the apparent revival of economic activity in all the major advanced capitalist regions, along with continued fast growth in China and India.

And, as the leaders of these countries emerge as the new votaries of globalisation, there is anticipation that the combination will be enough to bring back the glory days of the mid-2000s, when cross-border trade and investment drove significant expansions of income across the world.

Trade is back?

Is this optimism justified? In fact, there is little in terms of real change in policy orientation, much less any attempts at internationally co-ordinated fiscal expansion designed to lift the incomes of the bulk of the people.

So even in this current phase, much will depend on how uneven this growth is, and whether it raises the incomes of those who have thus far been excluded from major gains, or contributes to the rising inequality that has contributed to lack of demand globally. If the latter, then even the current revival is not likely to be more than one more bounce of the dead cat.

In any case, several of the optimistic observers appear to be basing their hopes on the idea that this recent slight increase in GDP growth in some regions is based on the forces of globalisation — and specifically of global trade — once again exercising their dynamism.

But the role of cross-border trade in goods and services in pushing economic growth is likely to have changed since the global crisis.

Figure 1, which describes the movement of the total value of global trade in goods and services (in $ billion) shows just how much this has changed. In the period before the global crisis, trade increased faster than income (and sometimes much faster) every year.

But since then, not only has trade growth been much slower than that of income, but in several years, it did not grow at all or actually fell in absolute value.

In fact, once the immediate post-crisis fiscal stimulus was dampened by the return of fiscal conservatism, world trade has stagnated and then fallen.

 

 

Goods push

This was essentially driven by trade in goods, which was mostly flat between 2011 and 2014, and then fell in the subsequent two years. The (projected) recovery of trade values in 2017 would still be insufficient to bring it back to the levels experienced three years previously, and nearly 10 per cent lower than in 2014.

The difference between the two periods becomes even more evident in Figure 2, which shows a dramatic deceleration in both volumes of trade and unit values (expressed as price deflators in both US dollar and SDR terms; SDR is the IMF’s reserve asset). Since 2009, trade volumes have grown at less than half the rate achieved in the decade before the global crisis. But even more significantly, trade unit prices have collapsed, showing zero change in SDR terms and absolute decline in US dollar terms.

Figures 3 and 4 show how this price deflation (in $ terms) or stagnation (in SDR terms) has affected different groups of countries. Since 2012, emerging and developing countries have experienced worsening terms of trade — even the slight recovery projected by the IMF for 2017 keeps the terms of trade of this group 6 per cent below the 2012 level. They have only been able to keep total trade values up by substantially increasing trade volumes, essentially export volumes, which have increased by 17 per cent between 2012 and 2017.

 

 

Oil’s not well

Predictably, oil exporters have been the worst hit, as indicated in Figure 4. But even non-fuel exporters among developing countries have scarcely benefited in price terms.

And they too have tried to cope with stagnant or falling export prices by significantly pushing out export volumes, which increased for this group by 21 per cent between 2012 and 2017.

So the picture of global trade is one of deceleration if not stagnation, where developing countries desperate to boost trade revenues in an environment and still slow growth raise export volumes by reducing prices to an extent where the value of trade remains below what it was in the immediate aftermath of the crisis.

This kind of competitive pressure — involving the well-known race to the bottom — generates tendencies for cost cutting and especially wage restraint, which in turn end up adding to the global problem of deficient demand.

Trade trends and patterns of this type cannot be indicative of greater global economic dynamism. Clearly, the current recovery will not be sustained unless trade expansion is also put on a more secure footing through concerted global efforts involving a fiscal push and more emphasis on higher wage incomes across the world.