Opinion

Trade is the true test of the world’s green shoots

The government shutdown aside, news from the US has been encouraging; despair on the eurozone is abating; and the Chinese slowdown has been orderly. Green shoots have appeared before, only to disappoint. Might this time be different?

By: Date: October 10, 2013 Topic: European Macroeconomics & Governance

A necessary amplifying force for the recovery is missing.

Following its sixth consecutive downgrade of global economic performance, the International Monetary Fund’s World Economic Outlook again projects a recovery around the corner. The government shutdown aside, news from the US has been encouraging; despair on the eurozone is abating; and the Chinese slowdown has been orderly. Green shoots have appeared before, only to disappoint. Might this time be different?

World trade is a helpful lens through which to monitor global economic health. The collapse of 2008-09 was triggered by a financial earthquake but transmitted across the world by a precipitous fall in trade. Early in the crisis, industrial production fell at the same pace as at the start of the Great Depression in 1929-30 – but the trade collapse was unprecedented. Looking into the abyss, world leaders mustered a co-ordinated stimulus to limit the fall. Yet the rebound was powered by the Chinese appetite for imports that accelerated global trade in 2010.

That was misread as the end of the crisis. In early 2010, the recovery was expected to propel world gross domestic product to more than 4 per cent annual growth over the next five years, higher than in the boom years of 2003-07. But GDP growth in 2013 will be less than 3 per cent. Private deleveraging, the shift from fiscal stimulus to austerity, and structural deficiencies – now more manifest – are to blame.

A crucial element of global forecasts was the view on world trade, which was projected to grow between 2011 and 2013 at an annual rate of 6 per cent, 1 percentage point above its average over the past few decades. It has fallen short. For 18 months it has grown at a paltry annual rate of about 2 per cent.

Today the world economy is in an unusual phase: world trade growth is below world production growth rates. So a necessary amplifying force for a global recovery is missing. In fact, economic distress is being spread through global trade.

The eurozone is central to this dynamic. Though the global ripples are not as manifest as they were amid financial turmoil, they are real. European economies are among the most trade-intensive. As they have fallen into a stupor, their imports from each other have imploded.

But Europe’s economic size ensures its sharply reduced imports generate substantial global spillovers too. The effects have been felt directly in Asia, with which Europe has strong trade links. As Asia has slowed, so has the demand for commodities, sucking a larger group of emerging economies into this downward ambit.

In turn, weak world demand is exacerbating the domestic dysfunctions of emerging markets. Their resilience was applauded during the critical phase of the crisis. The IMF’s WEO just six months ago still viewed emerging economies as the new engine of world growth. But without the buffer of global demand, their longstanding structural problems have resurfaced. The sharp currency depreciations faced by Brazil, India, Indonesia and Turkey were a wake-up call.

Now the bets are again on developed economies. Yet today there is no global locomotive. Continued US recovery requires the same consumer-driven boom that led to the crisis. China must curb its excesses. Economic revival elsewhere awaits a boost from robust trade; but deep-rooted country stresses, magnified by global interconnections, hamper trade growth. There is little scope for further monetary activism and no appetite for fiscal stimulus. Politics everywhere is stymieing the pace of policy action, as the US government shutdown reminds us.

The global economy is barely moving forwards. The hope is that good news will jolt it into a self-reinforcing lift-off. But equally, bad news and policy errors could rapidly aggravate vulnerabilities.

History requires us to heed this warning. During the climb back from the Depression, world trade also grew at or below world production rates. Barry Eichengreen of the University of California, Berkeley, wrote that, without a co-ordinated global policy, each country needed time to heal its wounds before re-emerging as a productive contributor to world trade and growth. The healing happened in time – but, if the Depression started in 1929, we may still be in 1933, with a few years before global growth is robust. A quick change in that dynamic may prove elusive.

This article was first published in the Financial Times.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic
 

Blog Post

A world divided: global vaccine trade and production

COVID-19 has reinforced traditional vaccine production patterns, but the global vaccine trade has changed considerably.

By: Lionel Guetta-Jeanrenaud, Niclas Poitiers and Reinhilde Veugelers Topic: Global Economics & Governance Date: July 20, 2021
Read article
 

Blog Post

Will European Union recovery spending be enough to fill digital investment gaps?

The recovery facility will boost digital transformation, but questions remain whether it will be sufficient to achieve Europe’s digital ambitions.

By: Zsolt Darvas, J. Scott Marcus and Alkiviadis Tzaras Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 20, 2021
Read article More on this topic
 

Opinion

Increasing the global supply of essential medical supplies: Time for Europe to step up its global leadership

Europe has already made a significant financial contribution to beating the pandemic, now it has the oppurtunity and moral responsibility to do more.

By: Anne Bucher and Guntram B. Wolff Topic: Global Economics & Governance Date: July 19, 2021
Read article More by this author
 

Blog Post

The European Union’s carbon border mechanism and the WTO

To avoid any backlash, the European Union should work with other World Trade Organisation members to define basic principles of carbon border adjustment mechanisms.

By: André Sapir Topic: Energy & Climate, Global Economics & Governance Date: July 19, 2021
Read article Download PDF
 

External Publication

Building the Road to Greener Pastures

How the G20 can support the recovery with sustainable local infrastructure investment.

By: Mia Hoffmann, Ben McWilliams and Niclas Poitiers Topic: Global Economics & Governance, Testimonies Date: July 15, 2021
Read article Download PDF
 

Policy Contribution

A new direction for the European Union’s half-hearted semiconductor strategy

The EU needs a more targeted strategy to increase its presence in this strategic and thriving sector, building on its existing strengths, while accommodating its relatively low domestic needs.

By: Niclas Poitiers and Pauline Weil Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 15, 2021
Read article More on this topic More by this author
 

Opinion

Could the RMB dislodge the dollar as a reserve currency?

The dollar remains the world’s largest reserve currency, but it is facing both domestic and external risks.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: July 14, 2021
Read about event
 

Past Event

Past Event

Financing for Pandemic Preparedness and Response

How can we better prepare for future pandemics? In this event, co-hosted by the Center for Global Development and Bruegel think tanks, speakers will present "A Global Deal for Our Pandemic Age", a report of the G20 High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response.

Speakers: Masood Ahmed, Victor J. Dzau, Amanda Glassman and Lawrence H. Summers Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 14, 2021
Read article More by this author
 

Blog Post

Fit for 55 marks Europe’s climate moment of truth

With Fit for 55, Europe is the global first mover in turning a long-term net-zero goal into real-world policies, marking the entry of climate policy into the daily life of all citizens and businesses.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 14, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

What should public spending look like?

What should we do about the increase in public spending due to COVID-19? Bruegel Director Guntram Wolff and Former Deputy Secretary-General of OECD Ludger Schuknecht discuss.

By: The Sound of Economics Topic: Global Economics & Governance Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: European Macroeconomics & Governance Date: July 14, 2021
Read article More by this author
 

Blog Post

SPACs in the gap

Special-purpose acquisition vehicles could fill a gap in European equity markets and lure risk-averse investors off the sidelines.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 13, 2021
Load more posts