WTO Cuts Global GDP Forecasts, Cites Trade Wars and Tight Credit

The World Trade Organization's latest forecast projects trade expansion slowing significantly in 2019.

Roberto Azevêdo, Director-General of the World Trade Organization, speaking at UNCTAD's eCommerce Week forum in April 2018. The WTO's latest economic forecast points to a global slowdown ahead. Photo: UNCTAD, CC

In a just-released forecast, the World Trade Organization (WTO) is now projecting a merchandise trade volume increase of only 3.9% in 2018. That’s down from the group’s April 12, 2018, forecast of 4.4% for the same period. The WTO is also projecting trade growth to slow to 3.7% in 2019.

Global GDP growth will also slow during the same periods. The WTO now projects GDP growth will close at 3.1% for 2018 and dip to 2.9% for 2019.

Two issues are cited as major reasons for the significant cutback in GDP and trade projections.

The trade wars which erupted this year between major trading blocks have already caused economic damage. Actual spending on goods is itself down. Perhaps more significantly for the long term are what appear to be cutbacks in investment spending and decisions to invest in other regions. These could mean even less opportunity for trade until the global economy stabilizes.

The tariffs the Trump administration levied against China, Canada, and the European Union triggered most of these wars this year. As the U.S. proceeds with its new sanctions against Iran, trade issues will tighten globally in other ways. Though it was the U.S. which chose to pull out of the multilateral agreement on its own, the U.S. is leveraging its trading clout and leverage over U.S.-dollar denominated financial transactions to force other countries and companies within them to back out of the deal too.

That last step will also create a global shortfall in oil supply as Iran loses contracts. It will likely push oil prices higher along the way. Since oil prices are already up 33% from January through August, this could hurt trade further as prices have to rise to absorb shipping costs.

The other issue flagged by the WTO as affecting global trade is the global tightening of credit worldwide. That is appearing first in developing countries. The United States has recently raised bank interest rates and its Federal Reserve Board has indicated it expects to continue raising those for some time to come. That means tighter credit globally. Though these higher rates are being imposed in part to combat inflationary pressures, a related concern is the inflationary pressures themselves. As the very economy which dramatically lowered unemployment rates in many countries continues to move upwards, pay rates are inching up faster than normal. That will feed inflation further, forcing many central banks to consider other steps to take to keep it from growing too fast in 2019.

As credit tightens globally, the developing countries, the sector most in need of investment funds, may find themselves more and more at the mercy of larger economies such as China and the increasingly-territorial multilateral banks.

That manifests in part in how import and export trade changes over time. North America itself reported the largest export growth for the first half of the year – at 4.8%. Asia was number 2 at 4.2% and Europe at 2.8%. Buyers for that export growth surged in Asia, the region which saw the highest import growth (6.1%), followed by South America at 5.5%, North America at 4.8%, and Europe at 2.9%. With North America’s imports and exports both up by the same amounts, that amounts to a flat trade situation between North America and the rest of the world for the first six months of 2018.

When the cut was made comparing developing to developing countries, developing countries continued to have problems both in increasing exports and being able to pay for increased imports. That trend may continue as 2019 proceeds forward.

Another important trend the WTO called out was that, as uncertainty both because of trade wars and credit tightening continued, global export orders appear to be dropping worldwide. This concerning statistic could ease considerably if somehow the larger trade fights in the world could lessen between the U.S. and both China and the European Union.

The just-announced tentative replacement for NAFTA known as USMCA (for United States-Mexico-Canada) may also help encourage more trade after over a year of arguments initiated by the United States.