Trade growth to slow to 1.7% in 2023 following slump in fourth quarter of 2022
The outlook for the global economy has slightly improved since the WTO’s most recent trade forecast was issued in October of last year but the pace of trade expansion in 2023 is still expected to be subpar, weighed down by the ongoing war in Ukraine, stubbornly high inflation, tighter monetary policy and financial uncertainty.
Trade volume growth
WTO economists are now projecting merchandise trade volume growth of 1.7% in 2023 – up from last October’s estimate of 1.0% – accompanied by real GDP growth of 2.4% at market exchange rates (see Chart 1). Growth rates for trade and output this year are expected to be below their respective averages of 2.6% and 2.7% for the 12 years since the trade collapse that followed the global financial crisis. Trade growth should rebound to 3.2% in 2024 as GDP growth picks up to 2.6%, but this estimate is more uncertain than usual due to the presence of substantial downside risks, including rising geopolitical tensions, global food insecurity, the possibility of unforeseen fallouts from monetary tightening, risks to financial stability and increasing levels of debt.
Goods trade was more resilient than expected for most of 2022 despite the drag exerted by the war between Russia and Ukraine. Year-on-year merchandise trade volume growth averaged 4.2% in the first three quarters of 2022 before a 2.4% quarter-on-quarter decline in the fourth quarter dragged growth for the year down to 2.7%. The final result for 2022 was weaker than the WTO’s October forecast of 3.5% but close to the earlier estimate of 3.0% from last April, which relied on simulations to gauge the economic impact of the war. A 2.7% increase in trade volume in 2022 is consistent with the WTO’s initial report on the crisis in Ukraine1, which estimated that trade growth for the year would fall somewhere between 2.4% and 3.0%. The final figure ended up being within this range and well
Several factors contributed to the trade slump in the fourth quarter of 2022, the most conspicuous being the rise in global commodity prices. Although food and energy prices had receded from their post conflict peaks by Q4, they remained high by historical standards and continued to erode real incomes and import demand. The impact of energy prices was strongest during the winter months in Europe, where gas supplies from Russia were cut off. High prices for wheat and other grains were also keenly felt in Middle Eastern and African countries that relied heavily on imports from Ukraine and Russia before the war.
On a more positive note, a WTO follow-up study marking one year of war in Ukraine2 found that vulnerable economies were able to find substitute products and suppliers to obtain essential food supplies. This response might not have been possible without an open and inclusive multilateral trading system to anchor the global economy.
Rising COVID-19 infections also had a major impact on the Chinese economy in Q4, where GDP growth dropped to 0.0% and exports fell 6.5%. This decline may be reversed to China’s advantage in 2023 now that pandemic controls have been wound down. The relaxation of such measures is expected to unleash pent-up consumer demand in China, which could provide a boost to international trade, particularly in travel-related services.
Finally, interest rate hikes in advanced economies may have succeeded in cooling demand by Q4 but they have also revealed weaknesses in banking systems that could lead to wider financial instability if left unchecked. After years of expansionary monetary policy, central banks find themselves in the difficult position of having to strike a balance between taming inflation, sustaining economic growth, and maintaining financial stability. Miscalculation could have negative consequences for the global economy and trade.
Reversing course on low interest rates was never going
to be easy, and the road ahead is likely to be bumpy.
Recent bank failures in the United States and Europe
highlight the possible existence of further vulnerabilities
stemming from a changed interest rate environment.
Upside surprises in inflation could raise the prospect
of bigger rate hikes but these would come at the risk of
broader financial contagion that would reduce output
and trade. Governments and regulators need to be alert
to these and other financial risks in the coming months.
Drivers of trade volume
Geopolitical tensions, inflation (and related measures), energy and other commodity prices, and the lingering effects of COVID-19 were the main drivers of trade and output in 2022. Last year saw some of the highest inflation rates since the 1980s together with massive swings in commodity prices and an appreciation of the US dollar. Since strong price movements tend to distort trade statistics in value terms, it makes sense to focus on trade volumes when forecasting trade.
Chart 2 shows quarterly merchandise trade volumes up to 2022 Q4 and projections up to 2024 Q4, including “error bands” to illustrate the degree of confidence associated with the forecast periods. The entire shaded region represents an approximate 85% confidence interval adjusted to reflect the judgement of WTO economists that risks are tilted to the downside.
The forecast incorporates mixed-data sampling (MIDAS) techniques that use higher-frequency data for selected economies (specifically, monthly statistics on container throughput in US and Chinese ports) to improve the quality of estimates. Since the pandemic, this information has helped capture the impacts of port congestion and supply chain disruptions on trade. If current GDP assumptions hold, merchandise trade volume growth in 2023 could be as low as -2.8% or as high as 4.7%. Trade growth for the current year could also fall outside of this range if economic conditions change.
The 2.7% increase in world trade volume in 2022 was weaker than the WTO's October forecast of 3.5%, as a sharper-than-expected quarter-on-quarter decline in the fourth quarter dragged down growth for the year. Several factors contributed to that slump, including elevated global commodity prices, monetary policy tightening in response to inflation, and outbreaks of COVID‑19 that disrupted production and trade in China.
Notably, trade growth last year turned out to be in line with the 2.4% to 3.0% baseline scenario in the WTO's March 2022 initial report on the war in Ukraine, and well above its more pessimistic scenario in which trade would have grown just 0.5% as countries started to split into competing economic blocs. In the event, international markets remained broadly open. A follow-up study the WTO released last month documented how vulnerable economies were able to compensate for essential food supplies cut off by the war by finding alternative products and suppliers.
The 1.7% forecast for trade growth in 2023, meanwhile, is up from the previous estimate of 1.0% from last October. A key factor here is the relaxation of COVID-19 pandemic controls in China, which is expected to unleash pent-up consumer demand in the country, in turn boosting international trade (see table).
WTO Chief Economist Ralph Ossa said: “The lingering effects of COVID-19 and the rising geopolitical tensions were the main factors impacting trade and output in 2022 and this is likely to be the case in 2023 as well. Interest rate hikes in advanced economies have also revealed weaknesses in banking systems that could lead to wider financial instability if left unchecked. Governments and regulators need to be alert to these and other financial risks in the coming months.”
Looking ahead to 2024, trade growth should rebound to 3.2%, as GDP picks up to 2.6%, but this estimate is more uncertain than usual due to the presence of substantial downside risks, including geopolitical tensions, food supply shocks, and the possibility of unforeseen fallout from monetary tightening.
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