Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Post-GFC trade slowdown indicative of a global malaise

By Tony Makin - posted Monday, 16 January 2017


One of the puzzles about the performance of the world economy since the 2008-09 global financial crisis has been that the slowdown in international trade has exceeded the slowdown in economic growth.

According to the World Trade Organisation, global trade grew at less than 2 per cent last year, whereas from 1985 to the GFC world trade grew twice as fast as world gross domestic product.

In other words, pre-GFC, internat­ional trade growth exceeded world GDP growth. Now the opposite is true.

Advertisement

So what has been smothering international trade? Is it mainly due to slower world growth itself? Is it because of higher protectionist measures and/or inaction on trade liberalisation? Has the rebalancing of China's economy from its past heavy reliance on investment and exports to greater focus on domestic consumption and services played a role?

In short, the answer to all of the above questions is yes.

But for policy reasons it is important we know how significant each factor is.

World GDP has slowed dramatically since the GFC, averaging less than 3 per cent a year compared with about 5 per cent in the five years before the GFC. Anaemic investment in advanced economies - notably in the US, the euro area and Japan - as well as China's rebalancing mostly explains this. China, the second biggest contributor to world GDP after the US, has a new normal post-GFC growth rate of almost 7 per cent. Before the GFC it averaged a rate of 10 per cent.

The first thing to note is that the relationship between inter­national trade and economic growth is not straightforward. It is two-way: economic growth causes international trade and inter­national trade causes economic growth. If economies are growing, trade is growing, and this forms a virtuous cycle.

Globalisation was a driver of pre-GFC global growth consistent with the theory that international trade was a powerful economic engine fuelled by the efficiency and productivity gains it generated. With this engine no longer in top gear, unemployment in advanced countries, especially in Europe, remains elevated, and global poverty reduction is less than it could be.

Advertisement

According to empirical work by the International Monetary Fund on this issue, the main cause of the trade slowdown since the GFC has been the slump in economic activity resulting from the investment crash. Three-quarters of the decline in trade growth since 2012 relative to the five-year period before the GFC is attributable to weaker economic activity arising from stagnant investment. This is because a high proportion of international trade is in intermediate and capital goods.

The weak investment driving the trade slowdown reflects poor productivity in advanced economies, still-damaged European and US banking systems, ongoing budget deficits that crowd out investment funding, the China factor and a global debt overhang that has never been higher.

The public debt component of global debt has increased on average by 25 per cent in advanced economies since the GFC and central government balance sheets have worsened accordingly. Australia's public debt and government balance sheet deterioration has paralleled this.

  1. Pages:
  2. Page 1
  3. 2
  4. All

This article was first published in The Australian.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

7 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Tony Makin is professor of economics at the Gold Coast campus of Griffith University and author of Global Imbalances, Exchange Rates and Stabilization Policy recently published by Palgrave Macmillan. He is also an the academic advisory board of the Australian Institute for Progress.

Other articles by this Author

All articles by Tony Makin

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 7 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy