World –Trade set to weaken further

Weak world trade growth is set to continue through 2019 and 2020 due to increased trade tensions, making conditions tough for Australian exporters.

The volume of world trade fell by 0.9% over the year to July 2019 (Chart). American tariffs on China, which were mostly at the rate of 10%, increased dramatically in May and there remains considerable uncertainty about scheduled tariff increases in October and December.

Increasingly trade policy uncertainty is negatively impacting world trade growth. A slowdown in the growth of world trade volumes has also spread geographically. In the first seven months of this year, exports either declined or stalled in the Eurozone, Japan, the Middle East and Central Europe. The World Trade Organisation now expects merchandise trade volumes to grow by 1.2% in 2019, down from a previous forecast of 2.6%. Trade volume growth in 2020 was also cut to 2.7% from 3.0%. Meanwhile, the IMF recently forecast world trade volume growth to fall to 1.1% in 2019 (down from 2.5% in July forecasts) from 5.7% in 2017.

Weak trade is affecting Australian exporters unevenly. Many commodity exporters have benefited from Chinese stimulus because much has been directed towards the construction sector, which uses copious Australian iron ore and coking coal. The impact of increased global uncertainty on the Australian economy has also prompted the Reserve Bank to cut interest rates, which has placed downward pressure on the Australian dollar and further supported manufacturing and service exporters.

Still, overall Australian and world economic growth looks set to be lower than previously expected in the coming years. The IMF recently downgraded its forecasts for global growth in 2019 and 2020, citing the downturn in global manufacturing and higher trade barriers as key drivers. This follows several similar downgrades to forecast growth since mid-2018.