World trade and international investment

The crisis of confidence that was triggered by the bursting of the real-estate bubble in the United States in 2007 and reached its height with the failure of Lehman Brothers in September 2008 spread rapidly from the financial system to the real economy, leading to a broadly based fall in output and a collapse of world trade. In 2009 world GDP declined by 0.6 per cent,1 with a larger contraction in the first six months and a slight recovery in the third and fourth quarters. No country was unscathed, but while the advanced countries saw GDP actually contract by 3.2 per cent, the emerging economies only suffered a slowdown and began to regain pace after a few short months. Asia confirmed its role as the engine of the world economy, maintaining a very high growth rate (6.6 per cent). In the countries of sub- Saharan Africa, still not strongly integrated into the international markets, economic activity also continued to expand, though more slowly than in the previous five years; excluding South Africa, which was hit hard, growth in the region averaged about 4 per cent. Trade in goods and services tends to contract more than output during recessions, but the particularly sharp and sudden collapse of trade in 2009 – 11.3 per cent on average for the year – was the most severe since the 1930s, partly because the crisis hit all countries simultaneously irrespective of their degree of financial integration. In recent decades trade had diminished only three times – in 1975 owing to the oil crisis, 1982 with the debt crisis, and 2001 with the bursting of the ICT or dot-com bubble – but never by more than 10 per cent. This outcome was the product of several concomitant factors. In the first place, there was a composition effect: the fall in global demand was particularly steep for investment goods and consumer durables, which account for a larger share of the volume of trade than of value added. This is related to the growing international fragmentation of production, which has strongly amplified the sensitivity of trade to changes in GDP. The difficulties in gaining access to trade credit, which penalize exporters based in countries with underdeveloped banking systems and smaller firms, were another important braking factor. World trade turned upwards halfway through the year, with volumes sharply higher than in the previous quarters but still below the peaks reached in 2008. The raw materials markets displayed extreme volatility. In the second half of 2008 the onset of the recession had caused commodity prices to come down rapidly from the peaks they had reached at the start of the year. The downward trend inverted as early as the first few months of 2009, anticipating the recovery of production, but prices were nevertheless considerably lower in 2009 than in 2008 on an average annual basis. The upswing in the prices of raw materials, particularly petroleum, appears to have strengthened in 2010, supported by the resurgence of demand especially in China and India. Some recent estimates indicate that China will become the world’s largest importer of oil and gas in 2025, and already in 2010 more than 90 per cent of the forecast growth in the demand for oil is expected to come from countries that are not members of the OECD, which continue to have a very high propensity to consume petroleum and its derivatives and have not made investments to reduce the energy-intensity of their production. From November onward, with the improvement in economic conditions in the United States, there was an inversion of the tendency for the dollar to depreciate against both the euro and the currencies of the energy-exporting countries. The prevailing uncertainty in the markets caused a surge in demand for US government securities, which were deemed low risk. At the same time, the euro came under speculative attack in connection with the weakness of the economic recovery and, most recently, supposedly unsustainable government budget deficits. The exchange rate of the yen did not vary significantly in the course of 2009. The renminbi was basically stable during the year, appreciating slightly against the dollar and the euro. At the start of 2010, however, a statement by the Chinese central bank suggested a change in monetary policy outlook that could have important consequences for trade relations. Balance-of-payments disequilibria lessened in 2009 but were not eliminated. China recorded a current account surplus equal to 10 per cent of GDP, one point less than in 2008, while the US deficit declined from 5 to 3 per cent of GDP. Contrary to the pattern of the recent past, trade in services outperformed trade in goods (down by 12.9 and 23 per cent, respectively, in current dollars) and services’ share of world trade consequently rose, interrupting a downtrend under way since the early 1990s. Despite the slowdown in output growth, in 2009 Asia was again the region making the largest contribution to the expansion of trade in goods. China and India fueled trade with neighboring countries in particular, increasing the intensity of intra-regional trade. China became the world’s leading exporter of goods, with 9.6 per cent of the total, overtaking Germany, whose share held at 9 per cent. After several years of decline, the share of the United States rose from 8 to 8.5 per cent and the US remained solidly in third place. In the unusual context of a decline in all the regions’ exports and imports of goods in both value and volume terms, there was a further rebalancing of market shares in favor of emerging countries. Inward foreign direct investment flows, according to UNCTAD estimates, suffered a large drop for the year, with a sharp contraction in the first quarter of 2009 followed by stabilization in the last part of the year. The decline is estimated at more than 50 per cent for the advanced economies and close to 39 per cent for the emerging countries. For the latter, it is related in part to the volatility of commodity prices, which had negative effects on foreign direct investment in Africa, and in part to the demand slowdown in China and India, which discouraged new investment projects in particular. Output and trade are both expected to pick up at global level in 2010. The IMF forecasts growth of about 9 per cent in trade in goods and services, but in the first few months of 2010 merchandise trade expanded at a very rapid pace (more than 13 per cent). Trade is already resurgent, especially in the emerging regions, as is shown by the period-onprevious- period data on Chinese imports,2 and consumption also shows some signs of reviving in the main industrial countries. However, especially in Europe, there remain the unknowns of the debt crisis and its repercussions. In 2010 goods exports are forecast to grow in volume by 7.5 per cent in the developed countries and by about 11 per cent in the rest of the world. The expectation, therefore, is that there will be a further change in the distribution of world trade, fueled by the shift of production to the East. However, the return of trade to pre-crisis levels will not be immediate. According to UNCTAD, foreign direct investment also will return to growth in 2010 and gain strength in 2011.