Trade engine shifts down just as global growth needs a boost

Sun Oct 12, 2014 7:33pm EDT
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By Krista Hughes

WASHINGTON (Reuters) - Policymakers scrambling to keep the world economy from settling into the "new mediocre" of sluggish growth can no longer rely on global trade to do the heavy lifting.

International trade helped the global economy tide over rough spots over two decades before the financial crisis, when it grew nearly twice as fast as economic output, but this engine is running out of fuel.

That is bad news for officials taking part in discussions at the International Monetary Fund and World Bank meetings this week, focused on preventing what International Monetary Fund chief Christine Lagarde warns could be a long spell of sub-par performance for the global economy.

The impetus from China and Russia opening their doors and the emergence of global supply chains, linking factories in emerging markets with rich consumers in the developed world, has largely run its course, economists say.

"It's that particular engine which seems to have exhausted its propulsive energy for now," said World Bank trade specialist Aaditya Mattoo.

The McKinsey Global Institute calculates trade and cross-border financial flows contribute up to a quarter of global growth, leaving policymakers with a gaping hole to fill if trade shifts into a lower gear.

As the IMF cut its global growth outlook, it also forecast annual trade growth to average just 4.2 percent in the 10 years starting in 2016, compared to 6.7 percent in the decade leading up to the 2008-2009 financial crisis.

One reason for that downgrade is obvious enough: it is hard to replicate the effect of an economy of China's size tearing down trade barriers.   Continued...

International Monetary Fund (IMF) Managing Director Christine Lagarde participates in a panel discussion during the IMF-World Bank annual meetings in Washington October 12, 2014. REUTERS/Yuri Gripas