The continuing financial and economic crisis, primarily in the US and Europe, has had a direct dampening impact on global trade flows with a concomitant impact on jobs and incomes as national fiscal policies have swung towards austerity measures in an attempt to reduce sovereign debt. The result of austerity, however, has been at a time of slow growth and is causing further reductions in growth and a drop in international trade as consumer and industrial demand evaporates.
All countries were impacted by the 2008 to 2009 recession through falling exports, rising unemployment and thus falling incomes. The global recession created an unprecedented decline in trade growth in 2009, affecting the capacity of trade to be an effective engine of growth. According to United Nation’s Committee on Trade and Development (UNCTAD), world trade declined 4.5 percent in 2009 as a direct result of the global recession, with most of the decline coming in consumer and industrial goods, with container volumes down by 9.7 percent. Conversely, with only mild growth in gross domestic product worldwide in 2010 to 2011, container trade expanded despite the hesitant state of the Western economies. According to the World Trade Organization (WTO), the expansion in the volume of world exports witnessed the largest annual growth recorded since 1950. The recovery was robust from mid-2009 to mid-2010, when trade volumes expanded at an annualized rate of nearly 20 percent. As economic growth faltered in 2011, as a result of austerity measures and sovereign debt crisis, this growth could not be sustained and trade again faltered.
International trade had been growing up to late 2007, before encountering the recessionary storm. From mid-2008, trade flows contracted sharply, affecting a large part of the OECD countries. The sharp drop in container traffic was unprecedented as consumers headed for cover and began to boost their savings in fear of becoming unemployed. Added to this was the banking crisis, with credit drying up completely. If no other lessons have been learned in the 2007 to 2011 period, the link between international trade and macroeconomic conditions in the main consuming countries of the Western economy is the most important to take to heart.
A major change in global trade and its relationship with gross domestic product growth has been globalization. Through the mid-1990s, expansion in the annual percentage growth of gross domestic product was broadly similar to the expansion of consumer goods defined as merchandise trade, which in turn was similar in seabourne trade. By the late 1990s however, as the result of the huge foreign direct investment in China, we began to experience the impact of the shift in sourcing of end consumer products and their reliance on international container trades. This shift became particularly visible during the period up to 2007 when world seabourne trade consistently outpaced gross domestic product growth. Hence the popular, but somewhat misunderstood concept of the back of the envelope calculation that for every percent of gross domestic product growth, container trade expands 2.5 to 3 times as much.
What was interesting was that most of the shipping related industry, including the wholesalers and retailers, claimed not to have seen the recession in trade coming, nor, as many carriers claimed, did they see the 2010 resurgence in trade coming their way in late 2009. It was not until April to May 2010 that the shipping industry began to react to a strong rebound in international deep-sea trade.
US case study
The linkage between the global economic crisis and the volume of international trade, particularly in the container read consumer sector can best be illustrated by a case study of US economic indicators.
Consumption makes up 70 percent of the US gross domestic product, making it a good economy to compare macroeconomic impacts on trade. In particular, the financial problems that have been ongoing since the collapse of Lehman Brothers in September 2008 provide us with an excellent opportunity to assess the interplay between the economic crisis and trade. The relationship between real gross domestic product and the volume of container imports is demonstrated above. Trade is in actual volumes and gross domestic product as the percentage change on the previous quarter. We can note that during periods of recovery trade growth is more rapid than gross domestic product growth, but in general they tend to correspond in timing. This suggests that gross domestic product cannot be used as a good forecasting tool, as the data is released in arrears of the quarter and is then revised two to three months later.
A short-term leading indicator of the direction of trade is the manufacturing output measured by industrial production and the Purchasing Manufacturers Index (PMI). The PMI tends to lead the changes in import volumes by one to two months. As industrial output is reported in a timely fashion on a monthly basis, it is one of the better macroeconomic indicators to consider when assessing the direction of trade.