World exports are stalling on a weak global recovery. According to data released last week by the World Trade Organization (WTO), world merchandise export volumes declined by 1.0% in the fourth quarter of 2013 compared to the previous quarter on a seasonally-adjusted basis.
This represents the largest quarterly decline since the Great Recession of 2008-09. Weak export demand from emerging markets (EMs) and sluggish growth in advanced economies (AEs) are the main factors behind this large decline. Unless world export growth picks up again, the global recovery is likely to falter in 2014.
Global trade is a key engine of growth for the global economy. For the period 1950-2007, global trade expanded by an average 6.2% a year, sustaining the rapid development of export-oriented economies in Asia and Europe. More recently, world merchandise exports grew by an average 6.0% a year during 2000-07, leading to strong economic growth in both AEs and EMs. This came to an abrupt halt with the Great Recession of 2008-09, when world merchandise export volumes declined by a cumulative 18.0% as the world economy went into a deep recession.
Since then, global trade has slowly recovered. World merchandise export volumes reached their pre-recession levels in the fourth quarter of 2010 and have since grown at a moderate pace of 3.2% a year. In particular, EMs have been a key contributor to world export demand as their economies have benefited from higher growth associated with a large inflow of global capital while the US was implementing its Quantitative Easing (QE). With the announcement by the Federal Reserves in May 2013 of QE tapering, global capital started flowing out of EMs, leading to an EM slowdown a corresponding decline in EM export demand (see our Economic Commentary dated June 8, 2014). This decline in EM export demand explains an estimated 63% of the decline in world exports in the fourth quarter of 2014. The remainder is mostly due to slower demand from AEs.
The decline in global trade seems to be continuing, based on the latest data from AEs. The US economy contracted by -1.0% in the first quarter, partly reflecting a large decline in net exports. In Europe, growth for the same period was also weak (0.2%) as large exporters like Germany suffered from the decline in EM export demand. Similarly, China witnessed a slowdown in growth during the same period, reflecting weak demand for Chinese products. The overall picture that emerges from these data is that the decline in global trade may continue into 2014.
If confirmed, a further decline in world exports would be worrisome as the only way to sustain the global recovery over the medium term is for global trade to resume its strong growth prior to 2007. Without such an expansion of global trade, it will be difficult for domestic demand in AEs and EMs to sustain their growth momentum. Even if central banks around the world were to continue to stimulate domestic demand through further monetary easing—as the ECB did earlier this month—the impact on the global recovery would be short lived and would not make up for a declining export demand. What is even more worrisome is that weaker global growth seems to become entrenched as prolonged low levels of economic activity are having an impact on the long-term potential growth that economies can grow at.
Overall, the recent decline in world exports puts into question how sustainable the global recovery really is. Unless world trade starts growing again at rates prior to the Great Recession, it is unlikely that domestic demand (whether stimulated by central banks or not) can make up for the difference. In turn, this may ultimately affect the long-term growth potential of the global economy.
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