In light of prolonged monetary tightening in the US and Europe and China's economic downturn, the WTO has halved its prediction for trade growth in 2023. We agree with the trend but diverge on details
The World Trade Organisation (WTO) has downgraded its growth forecast for global goods trade by more than 50%, as the rebound in global commerce that was hoped for, fails to materialise.
The WTO now forecasts global goods trade growth (in volume terms) of 0.8% in 2023, significantly lower than the 1.7% it was predicting in April. There’s better news for 2024, with the forecast growth of 3.3% slightly higher than the 3.2% figure given six months ago.
This adjustment comes despite forecasts for underlying GDP which remain largely unchanged. The WTO now predicts GDP growth of 2.6% for 2023 and 2.5% for 2024.
John Lorié, chief economist at Atradius, said: “This downgrade is not a huge surprise. Sticky inflation has kept interest rates high in the US and Europe, and the expected bounce from the post-pandemic opening of China’s economy has been undermined by persistent challenges in the Chinese property market. When you add in the effects of the war in Ukraine, subdued global trade was all-but inevitable.”
Atradius’ own figures support the WTO’s interpretation but remain slightly more upbeat in the short term. While trade growth is certainly weak, we expect global trade to grow by 1.1% this year and 2.5% next, corresponding to GDP forecasts of 2.5% and 1.9% respectively. The growth figure for 2023 is higher than the WTO counterpart, but we predict a smaller bounce back in 2024.
Our 2023 downgrade reflects new data for the first half of 2023 which shows 0.5% growth year on year. This compares unfavourably to a strong performance in the equivalent period in 2022. But growth weakened considerably in the second half of last year, which is why we expect year-on-year figures for 2023 as a whole to be significantly more positive than the first-half performance suggests.
While our forecast is slightly higher than the WTO’s for 2023, it is lower for 2024. The most important factor in this is our respective forecasts for GDP growth. We expect 2024 GDP growth in the US and Europe in particular to be much lower than the WTO forecast, creating downward pressure on global trade.
Nevertheless, we agree with the WTO that there will be a recovery in trade next year.
Reasons behind the downgrade
The more pessimistic view for 2023 is based on fading hopes for China and the impact of monetary tightening on Western economies. Trade restrictions, sluggish consumer spending and an ongoing real estate crisis have undermined Chinese growth prospects, and both exports and imports have been on a negative trend since July.
In the US and Europe, monetary tightening has led to higher financing costs and a higher cost of credit, impacting trade in both capital and consumer goods. Core inflation remains well above central bank targets in many economies. While global interest rates may have peaked, there is no expectation of a rapid fall in the near future.
“Monetary tightening and related high-interest rates, especially in US dollars, also have an impact on the availability of trade finance,” says John. “Around 80-90% of world trade relies on trade finance - credit, insurance, guarantees - and that is dropping at an annual pace of 4%.
“Tightening also affects the level of the US dollar against other currencies, causing dollar appreciation. As dollar invoicing is widespread in trade, such appreciation has a negative impact on demand, although with some lag.”
Finally, GDP growth is currently being driven primarily by services, which are less dependent on trade than the manufacturing sector.
There is some good news here, despite the gloomy forecast. Trade costs have reduced significantly. The supply chain stress that dominated during the pandemic has faded, and the global supply chain pressure index has reverted to normal levels.
Container shipping costs have also plummeted, with the Harpex shipping index back to roughly where it was before the pandemic.
In summary, we agree with the trends identified in the WTO’s latest global trade growth prediction, even if we diverge marginally on the details. This year will be a disappointing one for global trade, with a modest but welcome recovery expected in 2024.