Posted by

Vicky Pryce

11 Apr 2016

The World Trade Organisation (WTO) has revised its forecasts down again for 2016 to just 2.8 % from 3.9%. That is quite a substantial reduction and brings trade growth to the same modest rate as that seen in 2015. The main reason is a downgrade again of world economic growth. The WTO now expects world growth to be just 2.4 % this year and 2.7% next, not only because of a slowdown in emerging markets but also in developed nations including Europe. And the risks are mostly on the downside. That has important implications for UK exports.

World trade has not been leading world growth since the recovery started, unlike in previous cycles. There are some good reasons for this. The oil and other commodity price declines, reflecting earlier over-production and a slowdown in world demand in both the developed and developing world, have moved a number of previously fast growing countries like Brazil and Russia - also affected by sanctions - into recession . Geo-political tensions, particularly the upheavals in the Middle East, haven't helped.

But another reason for the poor trade numbers may well also lie in the nature of the reaction to the financial crisis itself and the severe re-trenching of the banking system. Bank lending has been contracting in many countries for a number of years. In the Eurozone it is only thanks to quantitative easing and extra cheap liquidity offered to the banks by the ECB that funding for businesses is beginning to revive. But much of this is within national boundaries. And banks remain constrained under the impact of low profitability and bank supervisory and capital pressures.

The worry in this environment is that funding for trade will remain limited, affecting trade flows. This is unlikely to change soon. And with most countries still unable or unwilling to engage in fiscal expansion to boost growth it is quite likely that next year's forecasts for trade may have to be revised down again.