Sunday, August 30, 2015
The world struggles when the trade winds don't blow
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

It has been a nasty scare, and it is not yet over. Though I think they are overstated, the doubts about China will persist. Though the sell-off appears to have reduced the ardour among central banks in America and Britain to raise rates – as was suggested in these pages last weekend – that bridge will still have to be crossed at some stage, and Mark Carney said at Jackson Hole yesterday that the rate decision will come into sharper focus around the turn of the year, an unchanged message.

Inevitably, there were fears that we were going back into a huge financial crisis. Larry Summers, the former US treasury secretary, helpfully tweeted that there were echoes of August 1997 (the start of the Asian financial crisis), August 2007 (the start of the global financial crisis) and August 2008 (just before the Lehman collapse).

If that was the equivalent of shouting fire in a crowded theatre, I thought a more sensible parallel was with August 2011. That was the month when the eurozone crisis escalated, America was downgraded following fraught debt ceiling negotiations in Washington and, by the by, riots broke out across England.

That sell-off did not presage a new global crisis and recession – most do not – but it ushered in a period of uncertainty and weaker growth, including a second recession in the space of four years in the eurozone, albeit one that was milder than the first.

It has been a while since markets have been quite so panicked as in recent days. Underpinning the uncertainty among investors, over and above Chinese growth worries, Greek exit fears and rate hike concerns, is the fear that something is not right about the global economy. The world was knocked off balance by the financial crisis and it is yet to recover its stability.

Are such worries justified? On the face of it, global growth is not too bad. The International Monetary Fund, in its latest world economic outlook update, published last month, sees 3.3% global growth this year, 3.8% next.

This year’s forecast is slightly below the 3.4% achieved in both 2013 and 2014, and all four years will see growth weaker than the pre-crisis world norm of 4% a year. But this is a long way from a growth crisis. The IMF, for what it is worth, shares my view of China, which is that we are seeing an adjustment, though a tricky one, to slower but ultimately better balanced growth.

There is something missing from the global economy, however. The Paris-based Organisation for Economic Co-operation and Development (OECD) calls it a “B-minus” world economy. I would call it a world lacking one of its key drivers.

That driver is world trade. A few days ago CPB Netherlands, the Dutch think tank which is a centre of expertise for monitoring world trade, reported that despite a rise in June world trade in goods in the second quarter was down by 0.5%, following a drop of 1.5% in the first quarter. According to CPB: “Import momentum was negative or zero in all major regions. Export momentum was positive in advanced economies, but negative in emerging economies.” Unless the June figures signal a sustained upturn, which looks unlikely given everything, this looks like a weak year for world trade.

CPB monitors trade in goods. Services are also important. But taking goods and services together, we are seeing a prolonged period of weak growth in trade. Alongside the IMF’s estimate of 3.4% economic growth in 2013 and 2014, world trade in goods and services expanded by 3.3% and 3.2% respectively.

For most of the post-war period world trade grew significant faster – often twice as fast – as global gross domestic product. If we take the period 1990-2007, world trade grew by an average of nearly 7% a year, despite a recession at the start of the period and a slowdown at the turn of the millennium.

In contrast, even leaving aside the collapse and rebound in world trade in 2009-10, trade growth in recent years has averaged only 4% a year and – as noted – has often struggled to achieve that.

That is reflected in Britain’s trade figures. Though exports had a good second quarter, helping to boost gross domestic product, until then export volumes had only grown by 1% a year over three years. Import volumes did a little better, though not spectacularly so.

Why the weakness in world trade? In the case of Britain, weak growth in the eurozone has been an important factor. Indeed, Europe’s slow growth has removed an important source of world trade growth.

But there are other factors. Exporters blame the failure of trade credit to get back to pre-crisis levels, even when governments are on hand to help out; some more than others. Risk aversion on the part of businesses may also have undergone a long-term shift as a result of the crisis.

Protectionism has not obviously increased but it may have done so discreetly. Certainly, the momentum for trade liberalisation, which was a key driver of global growth in the second half of the 20th century, has faded badly.

The Doha round, under the auspices of the World Trade Organisation, was launched as long ago as 2001 and shows no sign of reaching the finishing line. Initiatives like the Trans Pacific Partnership (TPP) and TTIP (Transatlantic Trade and Investment Partnership) have run up against a coalition of protectionists, vested interests and left-wing protest groups. Politicians seem to have decided they have enough on their plate without fighting the good fight on free trade.

The result is that the world economy is not firing on all cylinders. It is missing the trade winds that have blown us to prosperity in the past. What that means is that countries are having to generate growth under their own steam.

That is true in Britain, where net trade has made virtually no contribution to the recovery in recent years, though the latest figures were rather more encouraging. It is true in China, notwithstanding this month’s small devaluation of the renminbi.

When world trade is weak, adjustments to domestically-generated growth like those the Chinese authorities are trying to achieve become more abrupt, and more challenging. Recoveries like those in Britain are almost bound to be unbalanced. We would all benefit from stronger world trade. Sadly, it does not appear to be on the horizon.