Global trade recovering, but is it going back to the glory days?

Roubini Global Economics (RGE) recently reported on global trade prospects. Here are some excerpts from their latest report on global trade:

After slowing to 3.0% in 2008, global trade volumes contracted by an estimated 13% in 2009—the first contraction since 1982 and the sharpest in the post-war period. The decline came as global demand and large inventory destocking hit the global supply chain; the credit market turmoil caused a severe crunch in trade finance; and oil and commodity prices corrected following a boom in early 2008. After plunging during Q4 2008 and Q1 2009, world trade bottomed in Q2 2009 and started growing in Q3 2009. Fiscal stimulus and slower inventory destocking boosted domestic demand, infrastructure spending and global manufacturing activity, and drove global trade in capital and consumer goods, auto parts and commodities.

By the end of 2009, exports of major trading countries were far below their 2008 peak levels, with the exports of Japan and especially the EU lagging those of the US, Asia and Latin America. Imports of major trading countries, especially the U.S. and EU, stood far below their peak levels in 2008. Emerging Asia was the only major trading region in which imports reached 2008 peak levels.

RGE forecasts world trade will grow by 4.5%-5.0% in 2010, led by fiscal stimulus spending, inventory restocking and a small improvement in global demand. Chinese commidity stockpiling, despite slowing from 2009 and a slow pick up in the OECD’s commodity demand, will support bulk trade in 2010. After aggressive inventory cutbacks in 2009, inventory restocking by importers and exporters during H1 2010 will modestly boost global trade in intermediate and final goods. But with economic growth, consumption and investment below their 2007-08 peaks in most advanced and developing economies, the pace of inventory restocking will be weak and will end by mid-2010 in most countries. As a result, the boost to global trade from the inventory cycle will be small and short-lived.

During H1 2010, fiscal stimulus will continue to boost infrastructure spending, domestic demand and industrial activity. This will boost global trade in intermediate, capital and consumer goods, infrastructure-related commodities and auto parts and components. But the impact will wane in H2 2010 as most countries withdraw stimulus measures due to reviving domestic demand and fiscal concerns.

The Baltic Dry Index rose 200% in 2009, led by Chinese commodity demand and a pickup in commodity prices, but the index remains far below the record levels of 2008. While Chinese commodity stockpiling might have peaked, strong emerging market commodity demand, high global commodity prices and factors driving global trade (inventory restocking and fiscal stimulus) will support the Baltic Dry Index in 2010.

The impact of inventory restocking and fiscal stimulus on global trade will fade in H2 2010. Advanced economies' imports will slow as private demand remains sluggish, keeping emerging economies' exports weaker than in the pre-crisis years, notwithstanding improving exports to other emerging markets. Emerging market imports will pick up from 2009, but imports meant for export to the U.S. and EU will recover slowly. Trade growth in the coming years is unlikely to reach the highs of 8.0% witnessed during 2003-07, since imports and exports in the East-West trade might take a few years to return to their high growth rates. In fact, global trade itself might witness structural changes going forward as consumption grows sluggishly in the U.S. and EU.

Going forward, emerging markets will increasingly trade amongst each other for final demand, rather than re-exporting goods to the U.S. and EU, driving global trade flows and changing its direction and composition.