WTO: developing, transition economies cushion trade slowdown

London, 18/04/2008

World trade growth slid to 5.5% last year from 8.5% in 2006 and may grow even more slowly in 2008 — at about 4.5% — as sharp economic deceleration in key developed countries is only partly offset by continuing strong growth in emerging economies, according to World Trade Organization economists.

World trade growth slid to 5.5% last year from 8.5% in 2006 and may grow even more slowly in 2008 — at about 4.5% — as sharp economic deceleration in key developed countries is only partly offset by continuing strong growth in emerging economies, according to World Trade Organization economists.

WTO economists cautioned that their preliminary assessment of 2007 trade figures and forecasts for this year have been unusually difficult to gauge due to the uncertainty caused by sharp market fluctuations. 



The financial market turbulence, which has considerably reduced economic growth projections for some major developed markets, has clouded the prospects for world trade in 2008.

The present economic growth forecast for these markets is 1.1%. For developing countries, growth is forecast at above 5%. Together these could result in world output growth of 2.6% and a global trade expansion of about 4.5% in real terms, that is, discounting inflation.

"These are uncertain and troubling times for the global economy," said Director-General Pascal Lamy. "To date, the financial market turmoil, significant price surges and the slow-down of developed economies have not led to a disruption of trade. But protectionist pressures are building as policymakers seek answers to the problems that confront us. More than ever we must reinforce our global trading system with rules that are more transparent, predictable and equitable. 

"A reinforced trading system is an essential anchor for economic stability and development. Clearly, the best way to achieve this is to conclude the Doha Development round. The time for posturing and delay has ended. What we need now is action," he said.



The preliminary figure of 5.5% trade growth for 2007 is slightly lower than the 6% forecast for 2007 this time last year. The global economy and world trade started to slow down in 2007 due to the deceleration of demand in the developed regions. North America showed the weakest growth in output, measured as gross domestic product (GDP).

Developing economies and the Commonwealth of Independent States (CIS) region 1, however, maintained or strengthened their expansion of output, contributing more than 40% of world output growth in 2007. Developing countries' share of world merchandise trade (exports plus imports) reached a new record level of 34% in 2007.

These two groups of countries are expected to record faster growth in imports than exports; together they are expected to contribute more than one half of global import growth in 2008.



The sharp rise of commodity prices — particularly fuels and metals — greatly improved the financial situation of most developing regions and boosted imports. But, higher energy and food prices translated into inflationary pressures worldwide.

Significant variations occurred among major currencies, but not all exchange rate movements were helpful to redress global imbalances. While European currencies appreciated vis-à-vis the US dollar, changes in the currencies of Asian economies with large current account surpluses had a mixed impact.



The decline of the US dollar in relation to the euro and other European currencies inflated the dollar values of international trade transactions. The dollar value of world merchandise exports rose by 15% to $13.6 trillion, and that of commercial services by 18% to $3.3 trillion in 2007.

In real terms — with adjustment for price and exchange rate changes — real merchandise exports were up by 5.5% in 2007 compared to 8.5% in 2006.

Trade prospects for 2008
Recent developments cloud the near-term prospects for the world economy. Among these developments are widely held expectations of recessionary tendencies in the United States, weaker demand growth in both Europe and Japan, a rise in inflation and depressed global stock markets.

More positive news come from developing countries and the Commonwealth of Independent States (CIS), where strong output and trade growth are predicted. Uncertainty arises as to how long the developing countries can maintain a strong pace of economic growth in the face of sluggish demand in the major developed markets and rising inflationary pressures.

The central projections retained by major institutional forecasters indicate a further deceleration in world economic growth in 20087. If turbulence in international financial markets could be contained soon, and its impact on the real economy limited, world output could still grow at 2.6% (GDP measured at market exchange rates). 

Domestic demand in the United States stagnated in the fourth quarter of 2007 and may shrink in the first half of 2008. Imports of goods and services contracted between the third and fourth quarter in 2007 (seasonally adjusted) and are likely to decrease further quarter-to-quarter in the first half of 2008.

Exports, however, are expected to grow, sustained by a strong real effective depreciation and excess capacity in the US economy caused by sluggish domestic demand.

The slowdown in GDP growth in Europe is expected to be less pronounced than in the United States, maintaining developed country economic growth at slightly above 1% in 2008.

Despite signs of weaker demand in the United States and Europe in recent months, commodity prices started to rise faster again, helping to sustain short term growth prospects in most developing regions and the CIS.

In addition, these regions' reliance on developed markets for their exports has markedly decreased over recent years, which should limit the adverse effects of lower import demand from the developed countries. Foreign exchange reserves increased sharply and external debt levels have been reduced.

These trends should help developing countries and the CIS to maintain high investment and consumption levels, even if there is some softening of commodity prices in the second half of 2008. Overall, it is expected that GDP growth in developing countries and the CIS may be maintained at a level above 5% and import growth above 10% in 2008. Broadly, this is a positive picture for developing countries as a whole. But it has to be qualified because the picture is different in many low-income food-deficit countries due to the recent sharp increase in food prices.

As the prices of major cereals doubled on international markets between mid-2007 and March 2008 many developing countries are concerned about food security and a sharp rise in their import bill in 2008. Given the large share of food in the consumption of the poor in these countries, there is a risk that higher food prices could lead to an increase in poverty.

The political consequences of higher food prices are already being felt through civil disturbances in some countries. This situation poses grave challenges for governments. On the other hand, the UN Food and Agriculture Organization expects world cereal output to increase by 2.6% this year, which, if realized, could ease the situation somewhat in the second half of the year8.

Assuming a basic scenario of global GDP growth between 2.5% and 3%, global merchandise trade could slow down to about 4.5% in 2008, or about 1 percentage point less than in 2007. This estimate is supported by the results of the WTO Secretariat's time series forecasting model which predicts a slowdown in the OECD area's imports of goods and services to 3%, a further 1.5 percentage point decrease from the already subdued rate observed in 20079. 



This pessimistic outlook must be seen in the context of further significant downside risks, as foreshadowed by the severe declines in business sentiment captured by the Information and Forschung (IFO) economic climate indices for the euro area and the world as a whole.

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