Trade expansion will no longer outstrip overall economic growth as it once did for decades. Part of the explanation lies in the slowing pace of international vertical specialization (and other structural factors, such as increased trade protection or U.S. progress towards energy self-sufficiency), but the cyclical shortfall in investment in advanced economies and weak demand should not be ignored.
According to the World Bank, high-income economies account for some 65 percent of global imports, thus their soft demand translates into lower import volumes. A large negative turn-around in emerging economies’ import volume growth which happened in January 2015 supports our opinion that the strengthening greenback would be negative for the developing countries. The WTO confirms that “strong exchange rate fluctuations, including a 14% appreciation of the US dollar against other currencies between July and March” contributed to the sluggishness of world trade and output in 2014 and the beginning of 2015 (in February world trade fell by 0.9 percent month-over-month, following a 1.6 percent decrease in January).
What is the outlook for global trade and the economy? The WTO projects a 3.3 percent growth of global trade in 2015; however its estimations are typically overstated. The unexpected drop in U.S. output in the first quarter of 2015 (and any further shortfall in China’s performance, which is very probable) will negatively affect trade growth. This does not spark optimism about global economic growth, since global trade is perhaps the key barometer of the contemporary, interconnected and worldwide economy. Although the Baltic Dry Index has stabilized somewhat after its huge plunge, the actual value of trade calculated in USD (not the volume of goods) is sliding.
Should low commodity prices, low interest rates and many weak currencies not boost the value of trade and global economy? They should, but the U.S. economy is slowing down, which was partially reflected by falling exports: by around 2.9 percent in January (the biggest drop since 2009), and in February by 1.6 percent, to a two-and-a-half year low.
The drop in exports may be attributable to a rising U.S. dollar, however U.S. imports were also declining in January and February (see Figure 1), despite the strong greenback, which should, after all, boost imports. Forget the idea of U.S. decoupling from the rest of the global economy. The boom is apparently so powerful that U.S. consumers have lost their appetite for the Chinese goods they used to purchase in bulk, even with the weaker greenback.
It should be clear now that the slowdown in China (and other economies), which may ripple out across the globe, is directly related to the slowing levels of U.S. aggregate demand (in March, shipments to U.S. dropped by 8 percent). According to the CPB World Trade Monitor, world import volume declined in February on account of a contraction in advanced economies, mostly the U.S.