The economic benefits that have accrued from cheaper oil could easily reverse in the future if prices spike again. Photo: AP
by David Brown
by David Brown

Positive spin given to global economic outlook by WTO, IMF isn't justified

The aftermath of austerity cuts combined with deflation and corporate restructuring cast long shadows over sentiment and growth potential

It is often said that healthy trade flows help the global economy go round. The general pattern for decades has been trade expansion far outstripping global growth, but this has all unravelled in recent years as economic downturn, financial turmoil and geopolitical risks have all taken their toll. Global trade flows are barely keeping pace with world GDP growth.

It could spell bad news for the major trading nations like Germany, China, Japan and the US, all relying on better recovery in the world economy for a long-awaited upturn in business conditions. It could also mean a lot of difference to bullish expectations in world stock markets right now.

Supranational bodies like the International Monetary Fund and the World Trade Organisation are doing their best to put a positive spin on the outlook, but reading between the lines of their latest forecasts, there are good reasons to temper down the optimism.

World trade growth has been stuck in the doldrums for a number of years now, measuring 2.8 per cent in 2014 and averaging only 2.4 per cent for the last three years. This is well below the pre-crisis annual growth average of 6 per cent. In its April update, the WTO expects world merchandise trade to grow by 3.3 per cent this year and for a further uptick in trade growth to 4 per cent in 2016.

Meanwhile, the IMF Spring forecasts project global GDP to grow by 3.5 per cent in 2015, with growth expected to accelerate marginally to 3.8 per cent in 2016.

The IMF warns that growth will be uneven, with the outlook saddled with downside risks.

There may be sound reasoning behind expectations for modest recovery, but it is hard to reconcile the optimism with the raft of problems waiting in the wings. The positive impact of much cheaper oil prices and extremely accommodative monetary policies around the world has almost played out. With interest rates running close to zero in the major economies and fiscal capabilities overstretched, there is little else that global policymakers can do to inject much more stimulus into recovery efforts.

Currency devaluation has been pursued by a number of countries. The weaker dollar and sterling played key parts in the US and British recoveries. Likewise, the quantitative easing-fuelled falls in the euro and yen will help foster faster export-led recovery in the euro zone and Japan. But the IMF has warned that currency devaluation is a beggar-thy-neighbour policy option.

The IMF and WTO both acknowledge a formidable array of downside risks to future growth, warning that conditions for recovery remain fragile. The economic benefits that have accrued from cheaper oil could easily reverse over the future if prices spike again. Geopolitical uncertainties from Russia and Greece remain uppermost in investors' minds.

There is still a significant hangover from 2008 financial crisis. The aftermath of deep austerity cuts, the shadow of deflation and ongoing balance sheet restructuring continue to cast long shadows over economic sentiment and growth potential. Worries about a return to more "normal" US monetary policy are also a big bugbear for markets. Higher US interest rates and borrowing costs could not only damage domestic US growth prospects but could trigger another bout of capital flight from emerging markets.

Emerging markets are not only at risk of another "taper tantrum" from future Fed tightening. They are also having a tough time from the downturn in commodity prices and falling import revenues.

The two-to-one relationship that prevailed for many years between world trade growth and global GDP growth appears to have broken down.

In the long run, the IMF and WTO believe that the correct policy response is on-going structural reforms, reduced protectionism and improved market access to boost global growth and increase world trade. But there is no obvious quick fix.

In the short term, the markets will have to plot a course through potentially troubled waters. A deeper debt crisis in Greece could easily whip up a new storm. The global authorities will be pinning their hopes on more settled conditions and fair winds to keep world trade and global growth on a positive track. Hopefully they won't be grasping at straws.

This article appeared in the South China Morning Post print edition as: Positive spin given to global economic outlook isn't justified