Global Trade Shrinks and Germany Suffers

“Of all bad-neighbourly conduct among trading nations, the worst is to go into a slump.” (Joan Robinson, 1966)

The WTO has published a deeply pessimistic short term forecast for global trade in 2009 predicting that global trade flows will shrink by 9% this year with developed countries such as Germany and Japan feeling the worst effects of the downturn in international trade and exchange. Poorer countries will see exports fall 2-3%.

According to the new forecast, real global output growth halved to less than 2% in 2008 is likely to fall by between 1% and 2% in 2009. This is the first decline in total world production since the 1930s.

The WTO report – available here – emphasizes the growing importance of global supply chains which increases the size of the trade multiplier effect. In a recession the multiplier effect works in reverse and hits those countries where exports are a large percentage of national output. ‘Production for many products is sourced around the world so there is a multiplier effect — as demand falls sharply overall, trade will fall even further.’

Much of the decline in global trade is due to a fall in demand - pure and simple. And the credit crunch has also made it harder for businesses to find trade credit - as the FT said in a column today ‘A lack of trade credit has also hurt, given that 90 per cent of trade involves some kind of credit, insurance or guarantee.’

Germany is a good example of an economy facing a severe recession because of the shrinkage in global trade. Germany’s merchandise exports in 2008, at $1.47 trillion, were slightly larger than China’s $1.43 trillion. This meant that Germany retained its position as the world’s leading merchandise exporter. But a new forecast from economists at Commerzbank suggests that German GDP may shrink by more than 7% this year

40% of German GDP is exported and it is heavily reliant on machine tools and engineering that is levearaged to global industrial cycle. Germany’s traditional heavy focus on exporting manufactured goods is coming to be seen as an Achilles heel especially given the lack of an alternative source of domestic demand. The collapse in external demand, combined with no consumer demand and tighter credit conditions, means there is little incentive for firms to invest. Hence the domestic demand component of AD (C+I+G) is weak just at the time when overseas sales are falling off the cliff.