World Trade Up 14.5% in 2010, 2011 Forecast 6.5%

Following the record-breaking 14.5% surge in the volume of exports in 2010 world trade growth should settle to a more modest 6.5% expansion in 2011. The sharp rise in trade volumes last year enabled world trade to recover to its pre-crisis level but not its long-term trend and WTO economists believe the recent series of important events around the world lend a greater degree of uncertainty to any forecast.

The 14.5% rise was the largest annual figure in the present data series which began in 1950 and was buoyed by a 3.6% recovery in global output. It was a rebound from the 12% slump in 2009.

For 2011, the economists are forecasting a more modest 6.5% increase, but with uncertainty about the impact of a number of recent events, including the earthquake and tsunami in Japan. If achieved, this would be higher than the 6.0% average yearly increase between 1990 and 2008. The projection is based on a consensus estimate of global output growth by economic forecasters, who predict a GDP growth rate of 3.1% in 2011 at market exchange rates.

The short-term outlook is clouded by a number of significant risks factors in addition to the catastrophes in Japan. These include rising prices for food and other primary products, and unrest in major oil exporting countries. Adverse developments in any of these areas could potentially set back the economic recovery and limit the expansion of trade in the coming year.

Higher prices for primary commodities and the extraordinary growth of trade in developing Asia helped boost the combined share of developing economies and the Commonwealth of Independent States (CIS) in world exports to 45% in 2010, its highest ever.

Developed economies recorded export growth of nearly 13% in 2010, compared to a 16.5% average increase in the rest of the world. China’s exports increased in 2010 by a massive 28% in volume terms.

Growth in volume of world merchandise trade and GDP, 2000-11 a
Annual % change

 

chart1.bmp

a  Figures for 2011 are projections
Source: WTO Secretariat.

Prospects for 2011

World trade flows are continuing their recovery, building on the large gains of 2010, with slower but still slightly above average growth in 2011. However, recent events in the Middle East and Japan have raised the level of global economic uncertainty and tilted the balance of risk towards the downside.

WTO economists’ baseline projections for world merchandise trade in 2011 would see exports grow by 6.5%, with shipments from developed countries increasing by around 4.5% and those from developing economies and the CIS advancing 9.5%. These projections include the likely impact of Japan’s earthquake, but if the repercussions turn out to be worse than expected we would have to revisit the forecast in the coming months.

The 14.5% rise in exports in 2010 was quite close to the WTO’s most recent projection of 13.5% released in September. That forecast correctly predicted the growth of developing economies (16.5%) but underestimated the extent of the rebound in developed economies (11.5% compared to the realised figure of 12.9%)

The trade forecast assumes world GDP growth of 3.1% at market exchange rates for 2011, with developed economies gaining 2.2% and the rest of the world (including developing economies and the Commonwealth of Independent States) advancing 5.8%. The GDP projection refers to real GDP at market exchange rates based on consensus estimates of economic forecasters. 2

Even though the risks are mostly on the downside, there is also some upside potential if the uncertainly in the Middle East resolves itself soon and if unemployment rates start to come down more quickly in the United States. The latter would release a considerable amount of pent up demand for goods, which would stimulate imports and drive world trade higher.

The limited amount of existing research on the consequences of natural disasters for economic growth suggests that even very large disasters generally do not have noticeable effects on output as measured by GDP, especially in the long run. 3

Studies dealing specifically with the trade effects of natural disasters are even rarer. A recent paper by Gassebner, Keck and Teh (2010) 4 examines data on disasters in 170 countries between 1962 and 2004. Using the methodology of this paper, we find that the expected impact of the Japanese earthquake is to:

·         reduce the volume of Japanese exports by between 0.5% and 1.6%; and

·         increase the volume of Japanese imports by between 0.4% and 1.3%.

The reduction in exports is easily explained. Export declines occur because of the human losses and injuries (affecting companies’ human resources) and the destruction and damage to physical capital and equipment in the export sector. Furthermore, damage to public infrastructure, such as roads, bridges, railways, and telecommunication systems, can cause disruptions to the export supply chain.

What may be less clear is why imports are estimated to increase as a result of a disaster. This is because any major reconstruction or rebuilding of damaged infrastructure will likely increase imports, since the required materials, technology or skills may need to come from abroad. This should outweigh any drop in import demand stemming from lost output and income.

Some of the economic impact of the earthquake could be transmitted to other countries through global supply chains. Anecdotal evidence is already being reported on shortages of Japanese auto parts and electronic components in other countries, and on ships being unable to unload perishable food in Japan because of a lack of refrigeration due to reduced electricity supplies.

However, less output and trade in one quarter will probably be followed by increased activity in subsequent quarters, so the cumulative effect over the course of the year may not be large.

The prospect of sharply higher oil prices probably poses a greater threat to the world economy and trade than the Japanese earthquake. Fears of a prolonged conflict in Libya and spreading unrest in the Middle East have lifted oil prices above $100/barrel. An interruption of supplies from any other major producer would raise prices higher still, with potentially significant implications for the global economy. In such an event, the WTO would have to revisit its trade projections.

The above estimates of export growth are supported by the results of the WTO Secretariat’s time series forecasting model,5 which predicts a 4.5 per cent increase in demand for imported goods and services in 2011 on the part of developed economies (or more precisely, the members of the Organisation for Economic Cooperation and Development, or OECD).

 

Real GDP and trade growth of OECD countries, 2008-10
% change over same quarter in previous year

chart7.bmp

Note:  Q4-2010 exports and imports estimated based on available data.
Source: OECD Quarterly National Accounts.

Putting the trade recovery into perspective

A number of factors combined to make trade and output grow more slowly than they might otherwise have done. First, curtailment of fiscal stimulus measures in many countries dampened economic activity in the second half of the year. European governments in particular moved toward fiscal consolidation in an attempt to reduce their budget deficits through a combination of spending cuts and revenue measures, with negative consequences for short-term growth.

Second, although oil prices stabilized at around $78/barrel in 2010, they were still high by recent historical standards (e.g. oil prices averaged $31/barrel between 2000 and 2005). Prices were below the $96/barrel average seen in 2008, but they were also up 30% from 2009, raising energy costs for households and businesses.

 

Volume of world merchandise exports 1990-2011 a
Indices, 1990=100

chart2.bmp

a. Figures for 2011 are projections
Source: WTO Secretariat

 

The State of the World Economy and Trade in 2010

Economic growth

World GDP at market exchange rates expanded 3.6% in 2010, one year after an unprecedented contraction of 2.4% that accompanied the financial crisis in 2009. Output of developed economies rose 2.6% in the latest year after falling 3.7% in 2009, while the rest of the world (including developing economies and the CIS) grew 7.0%, up from 2.1% in 2009.

Growth was stronger in the first half of the year, but weakened in the second half as the sovereign debt crisis affecting smaller Euro area economies restrained economic growth, especially in Europe.

Although developing economies collectively avoided an outright decline in 2009, many individual economies saw their GDP contract, for example South Africa, Chile, Singapore, and Chinese Taipei. However, all of these economies returned to positive growth in 2010, and the only large developing country that remained mired in recession was Venezuela.

GDP grew faster in developing Asia (8.8%) than in other developing regions last year, with China and India registering strong increases of 10.3% and 9.7%, respectively. South and Central America also saw vigorous growth of 5.8%, driven by Brazil’s strong 7.5% upturn. However, Africa had the fastest average rate of GDP growth of any region over the last 5 years (4.7% between 2005 and 2010).

Developed economies grew more slowly than developing economies, but some performed better than others. Concerns about the possibility of sovereign defaults in Greece, Ireland, Portugal and Spain brought renewed financial market instability and fiscal austerity in the second half of 2010, which held Europe’s growth rate down to 1.9%, the slowest of any region. The economies of Greece, Ireland and Spain all contracted in 2010, as did Iceland’s, which was hit by a banking crisis in 2008.

The major exception to the below average GDP growth in Europe was Germany, whose 3.6% growth rate outpaced all euro area economies and all European Union (27) members except for Sweden and Poland. According to OECD National Accounts Statistics, Germany’s net exports of goods contributed 1.4% to its 3.6% GDP growth, or 40% of the total increase. By comparison, domestic final consumption expenditure only contributed 0.7% to GDP, or 19% of the total increase.

GDP growth in the United States was more subdued, at 2.8% in 2010, while Japan’s was up 3.9%. However, the Japanese recovery should be seen in the context of the 6.3% drop in output that the country experienced in 2009, the most severe decline among leading industrialized economies. Japan also ceded the position of the world’s second largest economy to China, measured in dollar terms. In terms of income per head, however, it may be noted that Japan’s per capita GDP was $44,800 dollars in 2010, compared to a figure of $4,800 for China.

Merchandise trade in volume (i.e., real) terms

The uneven recovery in output produced an equally uneven recovery in global trade flows in 2010. While world merchandise exports rose 14.5% in volume terms, those of developed economies increased by 12.9%, and combined shipments from developing economies and the CIS jumped 16.7%. Imports of developed economies grew more slowly than exports last year (10.7% compared to 12.9%) while developing economies plus the CIS saw the opposite happen (17.9% growth in imports compared to 16.7% for exports).

Asia exhibited the fastest real export growth of any region in 2010 with a jump of 23.1%, led by China and Japan, whose shipments to the rest of the world each rose roughly 28%. China’s trade performance is more impressive when one considers that the decline in the country’s exports in 2009 was less than half that of Japan (11% compared to 25%). Meanwhile, the United States and the European Union saw their exports growing more slowly at 15.4% and 11.4%, respectively. Imports were up 22.1% in real terms in China, 14.8% in the United States, 10.0% in Japan, and 9.2% in the European Union.

Regions that export significant quantities of natural resources (Africa, the Commonwealth of Independent States, the Middle East and South America) all experienced relatively low export volume growth in 2010, but very strong increases in the dollar value of their exports. For example, Africa’s exports were up 6% in volume terms, and 28% in dollar terms

An explanation for this can be seen in rising primary commodity prices, which resumed their upward trajectory in 2010, after plunging in 2009. Table 2 illustrates commodity price developments in the last few years. Despite recent volatility, the overall trend toward higher prices is clear. Prices fell sharply in 2009 as the global recession took hold, but then shot up again when growth resumed in 2010. The increases were driven to a large extent by rising import demand on the part of fast-growing developing economies like China and India. Between 2000 and 2010, prices for metals rose faster than any other primary commodity group, with average annual increases of 12%, followed closely by energy with 11% growth per annum. Only agricultural raw material prices stagnated, with increases of just 2% per year on average over the last 10 years.

Exports prices of selected primary products, 2000-10

Annual % change

 

2008

2009

2010

2000-10

2005-10

All commodities

28

-30

26

10

9

Metals

-8

-20

48

13

15

Beverages a

23

2

14

9

12

Food

23

-15

12

6

8

Agricultural raw materials

-1

-17

33

2

5

Energy

40

-37

26

11

8

a. Comprising coffee, cocoa beans and tea
Source: IMF International Financial Statistics.

Higher commodity prices lifted foreign exchange earnings in regions that export a lot of primary products and helped boost imports, especially in South and Central America, where the volume of imports jumped 22.7% in 2010, and in the CIS, where imports were up 20.6%. Africa’s import volume growth was actually the lowest of any region last year, at 7.0%, despite the continent’s large share of fuels and mining products in its total exports (64% in 2009 and 71% in 2008, when commodity prices were higher).

Merchandise and commercial services trade in value (i.e. dollar) terms

As a result of rising commodity prices and a depreciating US currency (down 3.5% on average against major currencies in 2010 according to US Federal Reserve nominal effective exchange rate statistics), growth in the dollar value of world trade in 2010 was greater than the increase in volume terms. World merchandise exports were up 22%, rising from $12.5 trillion to $15.2 trillion in a single year, while world exports of commercial services rose 8%, from $3.4 trillion to $3.7 trillion

Nominal merchandise exports of developed economies jumped 16% in 2010 to $8.2 trillion, up from $7.0 trillion in 2009. However, because this rate of increase was slower than the world average of 22%, the share of developed countries in world merchandise exports fell to 55%, its lowest level ever.

Transportation was the fastest growing component of commercial services exports in 2010, with an increase of 14% to $782.8 billion. That transport services grew faster than other types of services is not surprising since they are closely linked to trade in goods, which saw record growth last year. Travel grew in line with commercial services overall, whereas other commercial services (including financial services) advanced more slowly.

Chart 4 shows indices of estimated quarterly world trade in manufactured goods broken down by product. By the end of 2010 exports of manufactures had only just returned to a level close to their pre-crisis maximum, while particular categories such as automotive products and iron and steel were still well below their mid-2008 peaks.

World exports of office and telecom equipment declined less than other products during the crisis, but have grown faster since then. Exports of office and telecom equipment rose nearly 73% between Q1-2009 and Q4-2010, and automotive products increased by a similar amount (71%).

The share of office and telecom equipment in exports of developing economies is greater than its share in developed economies exports (15% in 2008 for the former, 7% for the latter) while automotive products are responsible for a larger share of developed economy exports (11%, compared to 4%), so it is perhaps not surprising that developed country exports have lagged behind those of developing countries since the crisis.

World trade in textiles and clothing did not fluctuate as much as other products in 2009 (down 14%) and 2010 (up 11%) but the category other machinery matched the trend for total manufactures almost perfectly.

The value of Germany’s total exports of automotive products was up 25% from $159.7 billion in 2009 to $199.6 billion in 2010. However, exports to China roughly doubled during the same period, from $8.7 billion to $17.6 billion. Also, while Germany’s exports to the rest of the world were down 34% in 2009, exports to China were up 12%. As a result, China has become the third largest market for German cars after the United States and United Kingdom.

Exports of vehicles and auto parts developed along similar lines in North America and also in Europe, but they diverged slightly in Asia in 2010, as the region’s exports of vehicles became more intra-regional, while trade in parts and components became more extra-regional.

Exchange Rates and Trade Balances

Trade imbalances of leading economies widened in 2010, as exports and imports bounced back from their depressed levels of 2009. However, for most countries the gap between exports and imports was smaller after the crisis than before.

The monthly trade deficit of the United States widened from a low of $32 billion in February 2009 to around $62 billion per month on average in the second half of 2010, and the deficit for the year increased 26% compared to 2009. However, the 2010 deficit of roughly $690 billion was 22% less than the corresponding deficit of $882 billion in 2008.

China’s merchandise trade surplus for 2010 totalled $183 billion, roughly 7% less than the $196 billion it recorded in 2009, and 39% less than the nearly $300 billion surplus of 2008. The European Union’s had a trade deficit with the rest of the world of $190 billion in 2010, which was up 26% from 2009 but down 49% from the $375 billion it recorded in 2008.

Japan was an exception to the trend towards smaller trade deficits/surpluses after the crisis. In 2008 the country recorded a $19 billion surplus of exports over imports, but this nearly quadrupled to $77 billion in 2010.

In terms of exchange rates, by February 2011 the Yuan had appreciated against the US dollar in nominal terms by around 3.8% from its previous level. However, real appreciation against the dollar is happening at a faster rate due to higher inflation in China. China’s real (i.e., inflation adjusted) effective exchange rate against a broad basket of currencies rose 1.3% in 2010 according to indices supplied by J.P. Morgan.

By comparison, the US dollar registered a 5% real effective depreciation against trading partners’ currencies during the same period.

The yen appreciated by nearly 7% in nominal terms against the dollar in 2010, but its real effective rate was only up by less than 1% on account of a falling price level (i.e. deflation) in Japan. This suggests that the higher value of the yen did not hurt the competitiveness of Japanese goods on world markets.

On the other hand, the strong nominal appreciations of the Brazilian real (12%) and the Korean won (10%) against the dollar were matched by large real effective rises (15% and 9%, respectively) that would have raised the cost of goods from these countries relative to other countries’ exports.

Nominal dollar exchange rates, January 2000 - February 2011
Indices of US dollars per unit of national currency, 2000=100

chart5-1.bmp

Source: Federal Reserve Bank of St. Louis

Notes:

1. World exports of goods measured on a balance of payments basis like services were also up 22% in 2010.

2. The IMF World Economic Outlook, the OECD Economic Outlook, the UN DESA World Economic Situation and Prospects and other national sources.

3. Cavallo, Edward, Galiani, Sebastian,  Noy, Han and Pantano, Juan (2010), "Catastrophic Natural Disasters and Growth," Inter-American Development Bank Working Paper IDB-WP-183.

4. Gassebner, Martin, Keck, Alexander and Teh, Robert (2010) ‘Shaken, not Stirred: The Impact of Disasters on International Trade’, Review of International Economics, 18(2): 351-368.

5. Keck, Alexander, Raubold, Alexander and Truppia, Alessandro (2009) "Forecasting international trade: A time series approach', OECD Journal: Journal of Business Cycle Measurement and Analysis, vol. 2: 157-176.  The model has