Analysis: World trade to fall further

World Trade Organisation (WTO) economists expect the strongest contraction in global trade since the Second World War, according to a WTO report. Exports will drop by roughly 9% in volume terms as a result of the global economic crisis.

Japan and Germany, two of the world’s biggest exporters and previously beneficiaries of global trade, have been battered as demand for their goods plummeted. Their economies are likely to be hit again as individual governments take protectionist measures.

“Domestic demand in both countries is weak. Therefore, they heavily depend on their exports,” says Kilbinder Dosanjh, a senior economist at the Economist Intelligence Unit.

Christopher Watling, the CEO of Longview Economics, adds that Japan and Germany share other characteristics that augment their reliance on exports. Japan has an ageing population that tends to save rather than consume and invest, he says. “Germany has similar characteristics in terms of demographics and spending habits. Access to credit is also very restricted. For example, it is hard for Germans to get credit cards or mortgages.” He adds that spending habits are “very different from those in the UK and the US”.

Both export giants have now released official data that shows their situation is even worse than expected.

Japan’s Ministry of Finance reports that its exports fell by 49.9% between February 2008 and 2009. Over the same period, imports fell by 43%.

Dosanjh forecasts further contractions of the Japanese economy – albeit not as stark as in the past.

He says that Japanese exporters are increasingly facing price pressure on top of the reduced final demand. “Another problem,” he adds, “is that trade finance is often not available because of the credit crisis.”

German exports fell by 20.7% year-on-year in January, the Federation of German Wholesale and Foreign Trade reports.

Germany’s Ifo business climate for industry and trade has also “cooled again somewhat in March”, the Institute for Economic Research (Ifo) says. “The firms have reported a further worsening of their current business situation. With regard to the business outlook for the coming six months, they are again slightly less pessimistic,” Ifo’s March report states.

Klaus Abberger, the head of the business surveys department at Ifo, says that those financial experts polled expect further throwbacks. “They said the economic climate has deteriorated further but we still haven’t hit the bottom.” He says that the downturn of Germany’s economy will be “longer and more severe” than initially estimated.

“Because our economy so heavily depends on exports,” the German economist says, “we cannot expect it to recover as global demand for our goods continues to decrease.”

Japan and Germany, Dosanjh says, are in a unique situation although many east Asian countries’ economies are also export-oriented. “The difference with China, for example, is that it is an immature economy and there is lots of scope for fiscal stimulus.” Despite the recent growth, poverty in rural China remains high and large parts of the country lack adequate infrastructure.

Dosanjh says the Chinese government was quick to introduce a heavy economic stimulus package, showing positive initial results. “The advantage of an autocratic government is that such measures can be implemented quickly. In democracies, many people have to agree on such measures.”

The massive Chinese stimulus package could even benefit Germany’s economy, Abberger hopes. “Germany is one of the foremost manufacturers of investment goods. We expect the demand for our goods to rise as Asian countries, especially China, invest in their infrastructure. It won’t be a big push but it will certainly help.”

Pascal Lamy, the director general of the WTO, says: “Trade can be a potent tool in lifting the world from these economic doldrums.” However, he is concerned about the rise of protectionist measures, which are increasing the risk of “choking off trade as an engine of recovery”.

“In London, G20 leaders will have a unique opportunity to unite in moving from pledges to action and refrain from any further protectionist measures which will render global recovery efforts less effective.”

The WTO statement says that real global output growth slowed to 1.7% last year, compared to 3.5% in 2007. On the backdrop of the latest economic development, it is likely to decrease by between 1% and 2% this year.

WTO economists expect that exports in developed countries will fall by 10% while exports in developing countries will decline by 2% to 3%.

While the WTO forecast 4.5% growth in world trade a year ago, its preliminary growth estimate is now “substantially lower” at 2%.
“In projecting trade growth for 2009, we assume a normal pattern for a recession, where trade falls, remains weak for a time and then resumes its upward trajectory,” the statement says.

“Since the recession began to take hold in the fourth quarter of 2008 there has been little cause for optimism in the outlook for trade in 2009.”

The statement adds that falling stock markets and housing prices have also caused negative shocks to wealth and led to a situation in which households are trying to rebuild their savings and are unwilling to buy durable goods. While ailing commodity prices have benefited importing countries, the WTO says, the development has deprived oil-producing countries of export revenues.

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