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Warnings from the Global Trade Cycle

The global trade cycle is facing major stress in 2019, downward revisions have just begun, and the risk of a major slowdown in world GDP growth cannot be minimized. In a still tightly connected world, no major economy will be an oasis.

NEW HAVEN – As the trade cycle turns, so goes the global economy. But there is a new twist. With growth in global trade sharply diminished since the 2008-2009 global financial crisis, an upsurge of protectionism and disrupted global supply chains is all the more problematic. There is a distinct possibility that a turn in an already weakened trade cycle could spark a surprisingly swift deterioration in the global economy.

Early hints of just such an outcome are evident in the January update of the International Monetary Fund’s World Economic Outlook. While the IMF has revised downward its 2019 forecast of world GDP growth by 0.2 percentage points (from 3.7% to 3.5%), it has made just a fractional reduction to its projection of 4% global trade growth. This is certainly puzzling. In a climate of increased tariffs between the US and China, with threats of more to come, and given Brexit-related risks to eurozone trade, there is good reason to look for more significant downward revisions to the global trade outlook.

This would be especially problematic, given that the world economy’s support from global trade is already on shaky ground. Following a crisis-induced plunge of 10.4% in the volume of global trade in 2009 – a modern-day record – recovery has been muted. After a brief two-year rebound in 2010-2011, world trade growth averaged just 3.6% from 2012 to 2018 – about half the 7.1% average annual pace in the 20 years before the crisis.

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