WTO's Stark Warning On Global Trade: "The Timing Belt On The Global Growth Engine Is Off"

Tyler Durden's picture

One narrative we’ve built on this year is that the subpar character of the global economic recovery isn’t just a consequence of a transient downturn in demand from China whose transition from an investment-led, smokestack economy towards a model driven by consumption and services has effectively caused the engine of global growth to stall. Rather, it seems entirely possible that an epochal shift has taken place in the post-crisis world and the downturn in global trade which many had assumed was merely cyclical, may in fact be structural and endemic. 

We touched on this in “Emerging Market Mayhem: Gross Warns Of ‘Debacle’ As Currencies, Bonds Collapse,” when we highlighted a WSJ piece that contained the following rather disconcerting passage: “Central to this emerging-market slump is the unprecedented weakness of world trade, which has now grown by less than global output for the past four years, unique since World War II.”

This echoes concerns we voiced in May, when BofAML was out warning that if “wobbling” global trade turned out to be structural rather than cyclical, “then EM economies should not count on meaningful demand boosts coming from above-trend growth in DM.”

Most recently, we looked at freight rates (which, incidentally, Goldman predicted earlier this year will remain subdued until 2020) noting that despite a dead cat bounce in the Baltic Dry, “freight rates on the world’s busiest shipping route have tanked this year due to overcapacity in available vessels and sluggish demand for transported goods. Rates generally deemed profitable for shipping companies on the route are at about US$800-US$1,000 per TEU. In other words, at current prices shippers are losing half a dollar on every booked contractual dollar at current rates.”

Now, WSJ is back with a fresh look at the new normal for global trade and unsurprisingly, the picture they paint based largely on WTO data and projections, is not pretty. Here’s more:

For the third year in a row, the rate of growth in global trade is set to trail the already sluggish expansion of the world economy, according to data from the World Trade Organization and projections from leading economists.


Before the recent slump, the last time trade growth underperformed the rate of an economic expansion was 1985.


“We have seen this burst of globalization, and now we’re at a point of consolidation, maybe retrenchment,” said WTO chief economist Robert Koopman. “It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should.”


Since rebounding sharply in 2010 after the financial crisis, trade growth has averaged only about 3% a year, compared with 6% a year from 1983 to 2008, the WTO says.


Few see any signs that trade will soon regain its previous pace of growth, which was double the rate of economic expansion before 2008. In 2006, global trade volumes grew 8.5%, compared with a 4% expansion in global GDP.


This year the WTO is expected to cut its 2015 trade forecast a second time after a sudden contraction in the first half of the year—the first such decline since 2009.


“It’s fairly obvious that we reached peak trade in 2007,” said Scott Miller, trade expert at the Center for Strategic and International Studies, a Washington, D.C., think tank.

And this, bear in mind, is the environment into which the Fed intends to hike, even as the emerging economies which have been hit the hardest by the slowdown in trade (which has served to depress commodities and wreak havoc on commodity currencies) would likely suffer from accelerated capital outflows in the wake of an FOMC liftoff. 

What's also notable here is that this comes as central banks have engaged in round after round of easing in a desperate, multi-trillion quest to boost global growth, suggesting that competitive devaluations are a zero sum game and to the extent that individual countries can boost exports in the short term by devaluing, that gain comes at someone else's expense, meaning, in The Journal's words, "foreign-exchange moves have little chance of raising trade overall" and even if they did, the backdrop of depressed demand means that what many EMs are producing, no one now wants, irrespective of how cheap it may be.

Make no mistake, the most worrying part of the new normal for trade is what it portends for emerging markets. We've already seen Brazil's investment grade rating cut by S&P as the country careens headlong into fiscal, political, and economic crises. As Morgan Stanley put it in August, Brazil is the epicenter and one can reasonably expect that other EMs will follow in its footsteps should the WTO's projections about the sturctural nature of depressed global demand and trade prove accurate. What comes next is the descent of the emerging world into frontier status, and as we've put it on several occasions, after that it will be time to break out the humanitarian aid packages.

Of course, as we mentioned late last month, there is one more possibility: central banks could learn how to print trade. 

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Oldwood's picture

The timing belt is off and the repeated attempts to start the engine of growth without accurately recognizing the problem have only succeeded in bending the valves and cracking the pistons.

This baby is going to need a full overhaul!

Maybe just a whole new engine would be best.

J Jason Djfmam's picture

Perhaps they could print "Trade" with a 3D printer.

Soul Glow's picture

Timing belt?  This is structural.  Someone - namely Keynes - built the engine wrong.

Oldwood's picture

Keynes thought he could supercharge the engine by forcing hot air down its manifolds without recognizing that a higher octane fuel would be required. The resultant pre ignition "knock" has wrecked the valve train and crashed the engine. Our octane is our willingness to actually work, to strive for success, that a supercharged economy of inflation has created. Instead we have pre ignited, choosing the path of debt, cheap illegal labor and slave wage imports, enjoying our fruits of labor not yet having reached top dead center. Now our engine is broke, the wheels are off and there is no easy way to put it back together again. Until we are willing to actually strive to achieve, to actually work rather than wait for our entitled "success" or prosperity, we will sputter and knock but never actually run again. Every nation that has succeeded has done so coming out of a depressed state and striving for some new goal, some sense of greatness or accomplishment. Who in this country, in ANY developed country thinks this way today? Until they do, here we all set. Until we find CAUSE to succeed, we will have none of it.

El Vaquero's picture

He also threw a big-ass bottle of NOS on there and Bernanke kept the NOS button pressed during most of his tenure. 

lincolnsteffens's picture

I don't think Kaynes advocating first  being perpetually bankrupt in good times only to borrow into infinity when hard times came. Only economists think it is stupid to save when you are flush and borrow when you are broke with no chance of paying back.

It is all bullshit ayway. There is no deficit as borrowing debt obligations is a double negative. It is all a fiction made up in the minds of criminals and transferred to computer ones and zeros. It isn't money. When the music stops and you are the one holding the bag of debt with pretty pictures on it, what are you going to exchange it for, wall paper?

11b40's picture

It is money until it isn't.  It buys real property.  Just ask you local private investment corporation.  

If you are close to the supply, you can get money in huge amounts for virtually no cost, which is then used to buy up corporations and real estate, creating real weallth from paper money.  Elegant in simplicity.

PlayMoney's picture

Losing 50 cents on the global trade shipping dollar will make markets soar. Bad is good. Right???

Westcoastliberal's picture

Once this progresses, the "just in time" distribution system will fall like dominoes, with the loss of each piece of the chain reverberating more extremely until the whole thing grinds to a halt.  Then we're talking whatever finished goods, food, water, etc. was in the system and can be stolen, sold, commandeered, etc. for the immediate aftermath.  Following that who knows. But happy days aren't here again.

MSimon's picture

Supply chains adjust. Never leave humans out of the equation.

Iam_Silverman's picture

"Supply chains adjust."

And timing chains don't.  They just get slacker and slacker until it jumps a tooth and you wonder why the economic engine is sputtering so badly all of a sudden.

Uber Vandal's picture

Supply chains adjust?!

I personally watched our operation ground to a halt over the want of ONE (1) component for it could not be sourced anywhere in the USA, and the non-USA vendor was having some sort of issue getting its component to us.

The same thing happened when one of our machines went down, and we scavenged the parts off an idle machine waiting for parts to come into inventory in the parts crib, and surprise, surprise, THAT machine broke down to, so we had TWO broken machines.

That totally messed up our production schedule, and put a lot of things into chaos for we could not meet deadlines.

But hey, supply chains adjust, right?

Truffle_Shuffle's picture

We need moar  power! 

Tyrone Shoelaces's picture

Moar QE will save us!  I hope....



Dominus Ludificatio's picture

Its more like the whole engine is worn out and  sputtering along to a full stop.

lincolnsteffens's picture

" in 2010 after the financial crisis, trade growth has averaged only about 3% a year, compared with 6% a year from 1983 to 2008, the WTO says."

Did they factor in the constant value of the fiat in that number??

What a chump I have been since I started slowly going short in 2010. Who'd a thunk the manipulation could be this strong for so much time in lifting world markets. I sure wish the FED would have sent me the same message they sent their co-conspirators that they would guarantee my investments. At least I don't have any Muni. or Corp. bonds and the gold sunk when I had a boating accident in 1500 feet of water in the middle of I don't know where. 

2muchtax's picture

They're going to have to upgrade the QE machine if they have to go to quadrillions.

gwar5's picture

The WTO is insousciant. Thanks Paul Craig Roberts for the new word.

Consuelo's picture

He definitely has a penchant for the use of that word --

Consuelo's picture

Perhaps Jim Willie's 'Gold trade note' might just be the way things get done at some point.   Soon.

q99x2's picture

Because of an oil seal leak my timing belt on my 1992 Toyota Corolla came off twice while on the 405 freeway. The first time I coasted down the offramp into a Mobil station that took 4 hours to fix it for exactly the $400 I had in my pocket. The second time it broke just past the same offramp and I had it towed with AAA to a service shop near my home 27 miles away. I had the seals replaced. Maybe the economy has an oil leak that needs to be fixed.

Iam_Silverman's picture

Well, as long as our economic engine doesn't have an interference fit, we should be able to survive.

o r c k's picture

 Why can't the public combine all their credit card debt and create financial instruments?

GMadScientist's picture

Because they don't play golf with the right crowd.

q99x2's picture

I have an idea. Why not create more jobs rebuilding the infrastructure in the United States of America to give citizens more money to buy American made products or purchase books on philosophy like the ones I buy.

Billy Shears's picture

Maybe some of those former EM could send over some of their surplus cheap food stuffs; $3.99 for a 6 oz. bag of non-GMO chips at the local mart. Waiting for some food deflation...


robertocarlos's picture

Should have bought a non-interference Toyota.

Sanity Bear's picture

You need a massive productivity advantage to shp something across the planet rather than make it locally. Manufacturing of easy-to-make items should be a local affair.

redd_green's picture

No, you need to 'fix' the monetary systems, and pay LOTS of bribes.

Joe A's picture

Club of Rome's predictions still on track.

nixy's picture

So what's it to be?...... break a few windows for the rent seekers...... or dig some more holes for the rent seekers?


What would a world be like without the rent seekers?

redd_green's picture

Fire all the Americans who had high paying manufacturing jobs. Make most of them either get a fast food job, that doesn't even pay enough to travel back and for to work, or go on welfare, or just sit at home.  

Close all the machine shops, so we can't make machine tools or machines, fire the 70.00 an hour machinists and make them go to work at Home Depot part time.  

Then close the research and development centers, and move them to Beijing. (like GE and other companies did or are doing)


Then sit back and watch the Free Market prosperity!  At leat it worked for the principals at Bain Capital.   Not the rest of the 150 million American's slipping or slipped into poverty.



nixy's picture

But there is no free market. There never has been. The machinist would never have recieve $70 an hour in the first place.

Under an HONEST free market the machinist that earned $5 an hour, 50 years ago, would still be earning $5 an hour ..... IF he was producing at a similar rate.