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WTO expects merchandise trade volume growth of 4.4% in 2018

 The World Trade Organization (WTO) anticipates merchandise trade volume growth of 4.4% in 2018, as measured by the average of exports and imports, roughly matching the 4.7% increase recorded for 2017.

Growth is expected to moderate to 4.0% in 2019, below the average rate of 4.8% since 1990 but still firmly above the post-crisis average of 3.0%.  However, there are signs that escalating trade tensions may already be affecting business confidence and investment decisions, which could compromise the current outlook.

"The strong trade growth that we are seeing today will be vital for continued economic growth and recovery and to support job creation. However this important progress could be quickly undermined if governments resort to restrictive trade policies, especially in a tit-for-tat process that could lead to an unmanageable escalation. A cycle of retaliation is the last thing the world economy needs. The pressing trade problems confronting WTO Members is best tackled through collective action. I urge governments to show restraint and settle their differences through dialogue and serious engagement," said WTO Director-General Roberto Azevêdo.

Trade volume growth in 2017, the strongest since 2011, was driven mainly by cyclical factors, particularly increased investment and consumption expenditure. Looking at the situation in value terms, growth rates in current US dollars in 2017 (10.7% for merchandise exports, 7.4% for commercial services exports) were even stronger, reflecting both increasing quantities and rising prices.

Merchandise trade volume growth in 2017 may also have been inflated somewhat by the weakness of trade over the previous two years, which provided a lower base for the current expansion. 

Until recently, risks to the forecast appeared to be more balanced than at any time since the financial crisis.  However, in light of recent trade policy developments they must now be considered to be tilted to the downside. Increased use of restrictive trade policy measures and the uncertainty they bring to businesses and consumers could produce cycles of retaliation that would weigh heavily on global trade and output.  Faster monetary tightening by central banks could trigger fluctuations in exchange rates and capital flows that could be equally disruptive to trade flows.

Finally, worsening geopolitical tensions could be counted on to reduce trade flows, although the magnitude of their impact is unpredictable. Technological change means that conflicts could increasingly take the form of cyber-attacks, which could impact services trade as much or more than goods trade.

On the other hand, there is some upside potential if structural reforms and more expansionary fiscal policy cause economic growth and trade to accelerate in the short run.  The fact that all regions are experiencing upswings in trade and output at the same time could also make recovery more self-sustaining and increase the likelihood of positive outcomes.

The WTO's trade forecasts are predicated on consensus estimates of global GDP, which have been revised upwards strongly in recent months.  World real GDP at market exchange rates is projected to grow 3.2% in 2018 (up from 2.8% last September) and 3.1% in 2019.  Brighter prospects reflect not only investment and employment gains but also improved business and consumer confidence as measured by OECD business cycle indicators, although these could be undermined by uncertainty going forward. The final figure of 3.0% for world GDP growth in 2017 was also stronger than the previous estimate (2.8% as of last September), which partly explains the fact that actual merchandise trade growth of 4.7% for the year exceeded even optimistic assessments (e.g. 3.6% in September, with a high end estimate of 3.9%).    

Despite the improved outlook, some structural factors that weighed on trade in recent years are still present. This includes the rebalancing of the Chinese economy away from investment (which has very high import content) and toward consumption (which has lower import content compared to investment), as well as the reduced pace of global trade liberalization in recent decades. 

China’s rebalancing might dampen imports slightly in the short-run but it should produce stronger, sustainable growth over the long term, which would support more trade.  On the other hand, the lack of further substantive liberalization would be expected to produce subdued trade growth in both the short and long-run.          

Historically, world merchandise trade volumes have grown around 1.5 times faster than world real GDP at market exchange rates. The ratio of trade growth to GDP growth (referred to as the "elasticity of trade with respect to income") rose above 2.0 in the 1990s, but fell back to 1.0 in the five years following the financial crisis (2011-2016).

This elasticity measure rebounded from 0.8 in 2016 to 1.5 in 2017, which is close to the historical average.  Stronger trade growth relative to GDP growth is expected to continue at least into 2018, barring major economic shocks.

Preliminary data suggest that trade is off to a strong start in 2018.  The WTO’s most recent World Trade Outlook Indicator (February 2018) pointed to above-trend trade growth in the first quarter, while other indicators such as export orders and container shipping are also suggestive of an ongoing recovery.  Tighter labor markets and modest increases in inflation in major economies will leave less room for error on the part of policy makers, but absent any missteps trade growth should remain strong over the next two years.

The acceleration of world merchandise trade volume growth to 4.7% in 2017 from 1.8% in 2016 was broad based, driven by rising import demand across regions but most notably in Asia. The largest gains were recorded on the import side in developing economies, where trade growth surged to 7.2% in 2017 from 1.9% in 2016. Import demand also picked up in developed countries, albeit less dramatically, as merchandise trade growth in volume terms increased to 3.1% in 2017 from 2.0% in 2016. Meanwhile, merchandise exports grew 3.5% in developed countries and 5.7% in developing countries last year, up from 1.1% and 2.3% respectively in the previous year. 

Although merchandise trade volume growth was stronger in developing countries for the whole of 2017, exports and especially imports of developed countries strengthened over the course of the year while trade growth in developing economies was more stable. 

Year-on-year growth of imports was considerably stronger in developed countries in the second half of 2017 (4.3%) than in the first half (2.3%), while growth eased slightly in developing economies (6.0% in the second half, down from 7.2% the first half). 

Export volume growth in developed countries also increased from 3.4% to 4.3% between the first half and second half, while growth in developing countries picked up slightly from 5.2% to 6.4%.

 


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