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May 10 2017

Improvement in Global Trade is Cyclical, Not Structural

Half a year ago, we first flagged the “improving global growth outlook” to our clients — which has only recently dawned on the International Monetary Fund (IMF). Already, the cyclical improvement following that call has had a wide-ranging impact on international economic activity, including trade.

A couple of years ago, in 2015, we observed that “world trade growth has essentially collapsed after rebounding from the financial crisis, despite some $11 trillion in international Quantitative Easing (QE),” underscoring the futility of competitive devaluations to grab larger shares of a shrinking trade pie, which “amount[ed] to war by other means.” Over the next 21 months — from January 2015 to October 2016 — the volume of world trade stayed flat (not shown), as cyclical weakness took its toll. It is only since last fall that the year-over-year growth rate of world trade volume has turned up (chart), rising to a 25-month high at the beginning of this year before slipping a bit.

Keep in mind that, even with this recent cyclical revival, world trade has grown at only 1½% a year over the last nine years. In comparison, over the previous eight years — between early 2000 and early 2008 — it had grown by over 6% a year. This demonstrates the dramatic structural downshift in world trade growth that cannot be remedied by any cyclical improvement that would naturally be relatively short-lived.

Needless to say, many observers will continue to conflate structural issues with cyclical ones. With regard to the latter, it is important to monitor ECRI’s leading indexes to anticipate potential cyclical shifts in global trade growth.

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