Is the global economy recovering?

Today the issue which seems to concern the international development community most (especially governments and international organisations) is whether it can be fairly claimed that generally, around the world, there are signs of recovery from the global economic crisis.

Previously, I have argued in these columns the global crisis has at its epicentre or core the bursting of the private housing market bubble in the United States. The securitized mortgage assets involved in this have turned toxic, impairing hundreds of major financial firms, not only in the US, but around the world. As a result, both a financial crisis and credit crunch (squeeze) of unprecedented magnitude and complexity are integral elements of the global economic crisis.

This sequence of events required me to first examine the US economy for signs of economic recovery or ‘green shoots’ among the dismal economic and financial trends being reported there. Furthermore, the global economy is so dependent on the performance of the US economy that, global economic recovery would be impossible without a US recovery leading the way.

In support of this observation, I had pointed out in earlier columns that in the late 1960s the share of the total value of US world trade in goods and services to its national output (GDP) was 10 per cent. Today this has risen to 30 per cent! There can be no doubt therefore that, the US economy is more open and interlocked with the global economy than it was four decades ago.

Trade and growth

During this period US trade grew more rapidly than its GDP. The world as a whole, however, also experienced the same phenomenal transformation. Today the global economy is far more open and more dependent on external trade in goods and services than ever before in its history. Increase in trade has become the foundation of economic growth in the vast majority of countries. Presently, it is estimated that three-quarters of the increase in global GDP is attributable to increases in global trade. Today, the total value of global trade in goods alone is estimated as US$14 trillion.

Indeed every year since 1982, the total volume of world trade has increased. For the first time since then, it is projected to decline this year. By way of comparison, world trade had increased by 8.5 per cent in 2006. While in 2007 this growth decreased, it remained high, at 6.0 per cent.

The latter part of 2007 up to mid-2008 witnessed a boom in the prices of major commodities traded on the world market. Readers would recall in that period, Guyana, like other developing countries, had to contend with extraordinary increases in the prices of imported food items and fuel. Food prices more than trebled and fuel prices peaked at US$147 per barrel. Several emergency measures were put in place around the world, in Caricom, and in Guyana to deal with what was termed the rising food and fuel prices crisis.

Commodity prices

The global economic crisis, particularly the economic recession aspects of this crisis, saw a collapse in commodity prices starting in the last quarter of 2008. In recent weeks these prices have been on the uptick, leading to the suggestion that global economic recovery is on the way. The truth is, however, that despite rising commodity prices, these are still quite some way off their peaks of less than a year ago. Thus oil prices, now ranging between US$67-72 per barrel, are in a price range which is less than half that of the peak of US$147 per barrel. Other commodity prices, which have risen by as much as two-thirds since December 2008, also remain at levels less than one-half that of their previous peaks.

The truth is many analysts believe, as I do, that it is not rising global demand which is behind the recent increases in commodity prices. If that were to be the case, this would indeed constitute a definite sign of economic recovery. Instead, commodity price changes are linked to speculation in the US dollar exchange rate. A weakening US dollar encourages speculative flight into commodities. Currency speculation, rather than rising global incomes, demand, and economic recovery, lies behind the recent increases in commodity prices.

The bottom line is that, if global trade is confidently expected to decline this year, then there can be no realistic expectation of economic recovery this year. The linkage between expanding global trade as the foundation of global economic prosperity has been unambiguously established.

Trade credit

The global economic crisis, as I have repeatedly noted in these columns, embraces a troika of occurrences, namely, a financial crisis, credit squeeze (crunch) and economic recession. The credit squeeze (crunch) has had a devastating impact on the trade of developing countries. Why is this the case?

Simply put, the credit squeeze (crunch) has produced a severe shortage of trade credit. Further, what credit remains available has been subject to an inordinate increase in its cost. In developing countries as a whole, 90 per cent of their trade (both importation and exportation) is dependent on accessing trade credit, according to World Trade Organization (WTO) estimates. The freezing of trade credit has caused their global trade to plummet, compounding the worsening effects of declining demand, due to the economic recession.

As a rule, the cost of letters of credit globally has trebled for major developing country importers like China and Brazil and doubled in others, like Pakistan and Argentina since the global economic crisis. Letters of credit are the primary financial instruments used in their global trade. Exporters depend on them to finance the production of their products before the receipt of payment from overseas purchasers. Importers also rely on them to purchase the items they need from sellers in other countries. Without such facilitation trade would be significantly curtailed, as it has been.

Next week I shall continue this discussion, expanding on the trade-related dimensions of the global economic crisis and its effects on developing countries.