Global trade recovers despite geopolitical problems and protectionism

Global trade recovers despite geopolitical problems and protectionism
Global trade recovers despite geopolitical problems and protectionism

Crédito y Caución’s latest Economic Outlook forecasts that global trade growth will improve to 2.5% in 2024 and 3% in 2025, in line with global GDP growth. This recovery follows a disappointing 2023, during which trade contracted by -1.2%. The evolution of global trade in 2023 was negatively affected by the eurozone, which represents 30% of the total and suffered a fall of -4%.

In 2023, major European markets faced difficulties due to four key factors. First, rising energy prices, especially gas, following the Russian invasion of Ukraine, severely impacted the European manufacturing industry, increasing input costs.

Added to this was the relative weakness of Chinese demand, business investment in capital goods, a context of high financial costs and the pressure of inflation on households’ real disposable income. To a certain extent, these factors also influenced the rest of the world, but their relevance was less.

In the United States, the impact of energy prices was mild. This, together with strong government support for the economy, favored the manufacturing industry. In addition, the American consumer maintained spending, even on durable goods, thanks to savings accumulated during the pandemic.

The forecasts for global trade growth in 2024 and 2025 are based on developments in these factors. In the euro area, manufacturing is recovering, helped by lower energy costs and more efficient production. Chinese demand and investment are also gradually recovering, and consumer disposable income is benefiting from lower inflation and wage growth. In addition, monetary easing will make credit cheaper. All of this points to higher spending on durable goods and an increase in trade.

Although the Red Sea crisis weighs on this outlook, the downside risk is relatively contained. The rerouting of ships around the Cape of Good Hope increases the journey time between Asia and Northern Europe by 30%, but affects only 9% of the world’s shipping fleet. Although shipping costs have risen sharply, there is no sign that supply chain constraints will break the decline in inflation. Limited global demand for goods and expansions in the container fleet support this claim.

Despite these forecasts, the credit insurer stresses in its report that trade growth will be structurally slow in the long term, fluctuating slightly above 3% and well below the average of 4.9% of the first decades of the millennium. Trade is increasingly taking place within like-minded blocs: on the one hand, the United States, the European Union and other OECD countries and, on the other, Russia and China. This effect is particularly pronounced in strategic sectors such as machinery and chemicals.

China’s share of US imports has fallen by almost eight percentage points since tariffs were put in place in 2017. While there has been some reallocation of trade to Vietnam and Mexico, this has only lengthened supply chains. Trade restrictions are also on the rise.

Trade is diverted and less trade is created. The result is less specialization, fewer economies of scale and less competition. The economic impact of this increased fragmentation, bilaterally and between blocs, will be a loss of benefits from international trade.

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