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Risk of worldwide slowdown increases significantly
Growth in global merchandise trade slowed to a crawl in the second quarter of this year, according to statistics compiled by the World Trade Organization.
Reporting WTO's findings Sept. 21, Director-General Pascal Lamy said that “in an increasingly interdependent world, economic shocks in one region can quickly spread to others,” in reference to the European sovereign debt crisis, high unemployment in the United States and China’s slowdown in industrial production.
WTO is looking for renewed commitment to revitalize international trade by improving economic certainty and adherence to free trade. “The last thing the world economy needs right now is the threat of rising protectionism,” Lamy added.
The growth in the volume of worldwide merchandise trade — measured by WTO as the dollar value of exports adjusted for price changes, thus focusing on the quantity of goods traded — reached only 5 percent in 2012, after an impressive surge of 13.9 percent in 2011. In the second quarter of this year, the volume of world exports edged up by an annual rate of 3 percent.
Given the disappointing international trade statistics in the first half of 2012 and an expected slowdown in worldwide economic growth, WTO is now more pessimistic than six months ago on future trends in global trade. “Slowing global output growth has led WTO economists to downgrade their 2012 forecast for world trade expansion to 2.5 percent from 3.7 percent and to scale back their 2013 estimate to 4.5 percent from 5.6 percent.”
Following a year of strong sales abroad, Michigan’s exporters now see the first signs of weakening in their orders from overseas as downside risks in foreign markets intensified in the last few months.
A global economic slowdown — which may reach recession levels in some countries — implies that foreign buyers would have lower income to spend for goods in general and goods made in Michigan in particular. This is the so-called “income-effect” that drives foreign demand for state exports and ultimately incomes and jobs in the local markets.
According to the latest international trade numbers, $4.74 billion worth of goods left Michigan for international markets in July, which was 9.6 percent less than in June. State exports are adjusted for seasonal variation — a statistical process that smoothes out monthly fluctuations for factors such as the number of days in a month and holidays, thus providing a clear picture of state performance similar to the national numbers.
On an annual basis, Michigan’s exporters posted gains in selling their goods abroad. In July of this year, foreign outbound shipments from state companies surpassed their mark set in July 2011 by $235.8 million, or 5.2 percent.
Exports of manufactured goods contributed significantly to the state’s international trade, accounting for 85 percent of all exports. In July, shipments abroad from Michigan’s factories decreased 8.3 percent to a seasonally adjusted volume of $4.02 billion from June and were 6.9 percent higher than in July 2011.
Exports of non-manufactured goods went down 16.4 percent in July to $721.6 million, adjusted for seasonal variation. This group of shipments abroad consists of agricultural goods, mining products and re-exports, which are foreign goods that entered the state as imports and are exported in substantially the same condition.
For the country as whole, exports of goods, seasonally adjusted, fell 1.5 percent in July to $130.8 billion, reflecting declines in industrial supplies and materials; automotive vehicles, parts and engines; and consumer goods. Through the first seven months of 2012, national exports of goods increased by an annual rate of 6.3 percent in comparison with the first seven months of 2011.
How did Michigan’s companies fare in export growth during the first seven months of 2012, which in turn impacts jobs and overall state economic development? In comparison with the same period of 2011, overseas sales from Michigan's companies — seasonally adjusted — increased by an annual rate of 12.2 percent. As a result, Michigan ranked 12th among states through the first seven months of 2012 in export growth.
Looking forward, leading economic indicators from around the world point to a weakening outlook for state exports. According to e-forecasting.com's worldwide leading indicators, a monitoring system of future economic activity in 47 countries, the risk of a new worldwide recession has increased. The 47-country composite leading indicator edged up by an annual rate of 1.9 percent in July, compared with a long-term average of 3.6 percent. Other long-term recession signals from the leading indicators now confirm that the risk of a worldwide slowdown has been substantially elevated.
In July, the combined leading indicator for the 17-country Euro Area declined for the 14th consecutive month. The combined leading indicator for the emerging economies group of BRIC (Brazil, Russia, India and China) — considered the engine of the 2010 global recovery — rose by an annual rate of 5.5 percent, slightly below its long-term average of 6.1 percent.
The anticipation of weakening in worldwide economic activity translates to a slowdown in the demand for goods made in Michigan. In the next six months, orders from abroad are expected to further weaken, which would lower production and fade export-related jobs in the local economy.
Evangelos Simos is chief economist of consulting and research firm e-forecasting.com. He may be reached at firstname.lastname@example.org