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Resilience in the face of geopolitical uncertainty: where is trade heading?

World trade is expected to grow by 2.6% this year and 3.3% next year, according to the World Trade Organisation’s (WTO) spring forecast. Analysts also forecast stable global GDP growth at 2.6% in 2024 and 2.7% in 2025.

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Despite geopolitical tensions and economic uncertainty, global trade has demonstrated considerable resilience. In 2020, international trade in goods fell by 5%, while GDP contracted by 3.1%. However, a significant recovery occurred a year later with trade surging by 9.6% and GDP by 6.2%.

The year 2023 was less successful. Rising inflationary pressures led consumers and businesses worldwide to cut back on goods spending, directly impacting international trade volumes, which fell by 1.2%. Notably, the WTO had anticipated this downturn, expecting a decline of over 0.8% in its October report, attributing this to high energy costs and inflation.

Fortunately, both global trade and GDP are projected to stabilise in the coming years. The WTO forecasts that trade volumes will increase by 2.6% and 3.3% in 2024 and 2025, respectively, with GDP growth mirroring these figures. WTO analysts believe that inflationary pressures, exacerbated by the Ukraine conflict, which have eroded real wages and incomes, will ease by 2024.

This is expected to boost investment and real incomes, thereby enhancing the consumption of industrial goods. Such a rebound in demand for consumer and capital goods is likely to positively influence the recovery of global and European trade over 2024-2025.

“We are moving towards revitalizing global trade with flexible supply chains and multilateral trading frameworks, which are crucial for improving living conditions and prosperity,” stated Ngozi Okonjo-Iweala, Director-General of the World Trade Organisation.

The Evolution of World Trade

The WTO warns that political uncertainties could curtail the anticipated recovery in trade. Food and energy prices might again face sharp increases due to geopolitical events. For example, the crisis in the Red Sea has had a relatively minor impact on the global economy despite disruptions in the Suez Canal affecting sectors like automotive, fertilisers, and retail severely due to delays and escalated transport costs.

The cost of shipping a 40-foot container soared to $6,800 by mid-January, a 176% increase compared to pre-pandemic levels. WTO analysts also highlight protectionism as a significant impediment to global economic development. Ralph Ossa, WTO’s chief economist, noted no signs of deglobalisation, though there were “indications of a fragmentation in global trade.” Bilateral trade between the United States and China, which peaked in 2022, fell to 30% last year, representing trade with the rest of the world.

Furthermore, in 2023, global trade in non-fuel semi-finished products, a barometer for the health of global value chains, dropped by 6%. Some governments are increasingly skeptical about the benefits of trade, taking steps to repatriate production and redirect trade towards more politically aligned nations, noted Ralph Ossa. He added that this shift would influence the evolution of global trade.

The WTO’s chief economist also pointed to disruptions in major shipping lanes, like the Panama Canal, which suffers from freshwater shortages, and the Red Sea, which sees traffic rerouted to alternative routes, underscoring the significant threats to international trade and global supply chains amid ongoing political tensions.

Surplus in the Eurozone

Regarding the EU economy, any trade restrictions or policy changes at the national or EU level could significantly affect regional trade. WTO analysts suggest this policy might encompass tariffs and quotas, as well as subtler regulatory mechanisms affecting goods flow.

Although the Eurozone’s economic growth was stagnant in the last quarter of the previous year, it reached 0.4% in 2023. Inflation led to a slight increase in consumption by 0.1%, influenced by the challenging labour market conditions.

The Polish Institute of Economics (PIE) reports wage growth aligning closely with inflation, while major EU economies like Germany and France saw minor increases in unemployment rates. “Public spending was the primary growth driver, increasing by 0.6% in 2023.

However, the industrial sector’s weakness remains apparent – the foreign trade balance reduced GDP by 0.3 percentage points,” according to PIE. Nevertheless, the Eurozone is emerging from its slowdown – the European Commission forecasts a GDP growth of 0.8% in 2024. This improvement is driven by an increase in household consumption, spurred by a decline in inflation and stable wage growth.

However, the main drawback remains the foreign trade balance – despite significant declines in the prices of natural gas and other energy resources, the competitiveness of its industry remains a challenge for Europe,” stated in the PIE Economic Review.

Initially, the Eurozone reported a trade surplus in EU goods with the rest of the world of EUR 11.4 billion in January 2024, a reversal from the EUR 32.6 billion deficit recorded in January 2023. Exports from the euro area to the rest of the world in January 2024 increased by 1.3% compared to the same period in 2023, while imports fell by over 16%.

In 2023, the Eurozone posted a EUR 64 billion surplus compared to the previous year, with exports decreasing by 1.1% and imports by 13.4%. Trade within the Eurozone declined by 5.1% last year compared to 2022. In January 2024, intra-euro area trade fell by 6.8% compared to the same period in 2023.

Photo by Bernd 📷 Dittrich on Unsplash