How big the fall in world trade in 2008/2009?
THIS big:
According to a new discussion paper published by the Federal Reserve global merchandised trade volumes contracted by a massive 19 per cent during the crisis.
Now, any contraction is a pretty rare event. After the tech bubble burst in 2001, world trade posted a peak-to-trough decline of 4.5 per cent. But before that there were only “rare quarterly incidents of small negative growth rates” the paper says.
Furthermore, the 2008/2009 trade collapse exceeded the contraction in global GDP by a pretty big margin — resulting in a decrease in the trade‐to‐GDP ratio of about 15 percentage points. Which kind of explains the second chart. As the paper puts it:
While it is well known that trade flows are generally more volatile than overall economic activity (and positively correlated with it), the decline in global trade in the fourth quarter of 2008 and the first quarter of 2009 are clear outliers (see Chart 2). Therefore, it is not surprising that standard quantitative trade models considerably underestimated the downturn in world trade in 2008‐09. Interestingly, though, the observations from the second quarter of 2009 onwards were again roughly in line with historical relationships.
All of which sort of makes forecasting the trade recovery even harder, and it’s this that’s really the thrust of the paper. To that end, here’s a bit from the conclusion:
Our analysis suggests that during the crisis both world trade and U.S. exports declined significantly more than would have been expected on the basis of historical relationships with economic activity. Moreover, this gap between actual and equilibrium trade is closing only slowly and, under reasonable assumptions, could persist for some time to come. Our analysis highlights that in assessing the nearand medium‐term outlook for trade, both globally and for the U.S. specifically, assumptions regarding the speed and degree to which the gap between actual and equilibrium trade closes are absolutely central to any projection for trade going forward. It is too soon to say with any certainty whether the crisis will have only transitory or persistent effects on the relationship between trade and economic activity. However, we have constructed plausible scenarios through which the impact on trade is both long‐lasting and meaningful.
Related links:
This isn’t your grandfather’s global trade collapse - VoxEU
Contingent liabilities, letter of credit edition - FT Alphaville
The erstwhile openess of emerging markets, chart du jour – FT Alphaville