The Strategist

Does global trade slowdown mean end of the Globalization Era?

09/29/2016 - 15:33

For the first time in 15 years, growth rate of world trade in 2016-2017 will be lower than growth rate of the global economy, according to the WTO. This trend marks the end of the globalization era. All in one, negative interest rates, huge debts, "bubbles" in financial markets, and low rate of global trade growth can lead to a new economic crisis.

According to the World Trade Organization’s forecast, world trade in 2016 will grow more slowly than expected, by only 1.7%. Previous April forecast assumed an increase of 2.8%. The forecast for 2017 has also been cooled down to 1.8 - 3.1%, whereas previously predicted growth was 3.6%.

The WTO noted that growth of world trade in 2016 is likely to fall below the world economy’s growth rate. The organization’s Director-General Roberto Azevedo draws a special attention to the alarming tendency.

"This is particularly worrying in the context of anti-globalization sentiment’s growth. We must make sure that they do not lead to erroneous policy, which will make the situation worse, not only in terms of trade, but also in terms of job creation, economic growth and development, which is so closely linked with free trade", - Roberto Azevedo said.

Earlier, other think tanks have already given a heads up on the sharp slowdown in world trade. In particular, it was discussed in the recent report of the Organization for Economic Cooperation and Development (OECD brings together advanced economies).

"Factors of demand play a role, yet weak trade also reflects structural factors and lack of progress, or even going backwards, in opening of global markets for trade in goods and services. Slowdown in trade growth will lead to lower rates of increase in labor productivity in the coming years ", - the OECD noted in a report.

According to experts, international trade is slowing across the globe, be it in China, Russia, Brazil, or the United States.

Peterson Institute for International Economics found that ratio of world trade to production has not changed since 2008, which is the longest period of stagnation after the Second World War.

Slowdown in the pace of trade to below the overall economic growth means actual end of the globalization model. It is based on expansion of trade relations, cross-border financial flows and disperse in different regions of production chains.

Obviously, roots of this problem are not in the trade as such The whole world economy is slowing down and is about to fall through into a new crisis. Most forecasters have lowered rate of global GDP growth to below 3% this year, which is lower than the long-term average. For example, the OECD pulled forecast for global GDP in 2016 down to 3 to 2,9%.

Developed countries have a policy of low interest rates, which gives a minimal effect. GDP growth in the US, EU and Japan, according to all forecasts, will not exceed 2% this year. At the same time, inflation will unlikely reach the level of 2%, population and business tend to save more, and net profit of the corporate sector is reduced.

So far, nobody has solved this riddle. Cheap money policy pursued by central banks of developed countries, does not give the desired effect. Debts are rising while yield on securities and deposits is going into the negative zone. On the other hand, cheap money is inflating bubbles in the financial markets.

Political risks in the West are also escalating the situation. Elections in the United States, Brexit, migration crisis in the EU, the next parliamentary elections in Germany are destabilizing markets and hinder adoption of balanced decisions.

In Europe, other problems are backed up by a crisis growing in the banking sector. In particular, Germany's biggest bank Deutsche Bank is on the verge of collapse. The US Justice Department demands it to pay a $ 14 billion fine for the 2008 crisis, and the bank's balance sheet has many toxic securities and loans. Recently, price of the German giant’s shares reached another historic low.

Latest report of the UN Conference on Trade and Development (UNCTAD) warns about a high probability of a new wave of financial crisis.

"Now, there is a real danger of joining the third phase of the financial crisis that began in the US housing market at the end of 2007, and then spread to the euro zone sovereign debt market," - the report says.

There are no prerequisites to ensure that the world situation would change for better. Developed countries are unlikely to quickly overcome the negative rates crisis. Developing countries will not be able to stabilize their economy as commodity prices remain low and consumer demand in key markets is stagnating. 


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