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WTO Slashes Trade Outlook as US Manufacturing Data Warns of Recession

Escalating trade tensions and a slowing global economy have led World Trade Organization (WTO) economists to sharply downgrade their forecasts for trade growth in 2019 and 2020.

At the same time, the U.S.-based September Purchasing Manager’s Index (PMI) fell 1.3 percent to 47.8 percent, the lowest reading since June 2009 during the Great Recession.

Global outlook darkens

The WTO economists now project world merchandise trade volume to rise 1.2 percent in 2019, substantially slower than the 2.6 percent growth they had forecast in April. The projected increase in 2020 is now 2.7 percent, down from 3 percent previously. The economists caution that downside risks remain high and that the 2020 projection depends on a return to more normal trade relations.

“The darkening outlook for trade is discouraging, but not unexpected,” WTO director-general Roberto Azevêdo said. “Beyond their direct effects, trade conflicts heighten uncertainty, which is leading some businesses to delay the productivity enhancing investments that are essential to raising living standards. Job creation may also be hampered as firms employ fewer workers to produce goods and services for export.”

Azevêdo said resolving trade disagreements would allow WTO members to avoid such costs. Rather than partaking in a tariff-fueled trade war, he said, “The multilateral trading system remains the most important global forum for settling differences and providing solutions for the challenges of the 21st century global economy. Members should work together in a spirit of cooperation to reform the WTO and make it even stronger and more effective.”

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The WTO’s trade forecast is based on consensus estimates of world gross domestic product (GDP) growth of 2.3 percent for 2019 and 2020, down from 2.6 percent from the previous outlook. The forecast report said slowing economic growth is partly due to rising trade tensions, but also reflects country-specific cyclical and structural factors. This includes the shifting monetary policy stance in developed economies and Brexit-related uncertainty in the European Union. In addition, “macroeconomic risks are firmly tilted to the downside,” it said.

Based on the high degree of uncertainty associated with trade forecasts under current conditions, the estimated growth rate for overall world trade in 2019 is placed at 0.5 percent to 1.6 percent. The range is wider for 2020, ranging from 1.7 percent to 3.7 percent, with an assumption that tensions will ease.

“Risks to the forecast are heavily weighted to the downside and dominated by trade policy,” the WTO said. “Further rounds of tariffs and retaliation could produce a destructive cycle of recrimination. Shifting monetary and fiscal policies could destabilize volatile financial markets. A sharper slowing of the global economy could produce an even bigger downturn in trade. Finally, a disorderly Brexit could have a significant regional impact, mostly confined to Europe.”

All geographical regions recorded positive year-on-year export growth in the first half of 2019 despite a substantial weakening of global demand, the report noted. North America had the fastest export growth of any region at 1.4 percent, followed by South America at 1.3 percent, Europe at 0.7 percent, Asia at 0.7 percent, and other regions, comprising Africa, the Middle East and the Commonwealth of Independent States, at 0.1 percent.

North America recorded the fastest import growth of any single region at 1.8 percent, followed by Europe at 0.2 percent. Two regions registered declines–South America at 0.7 percent and Asia at 0.4 percent).

U.S. manufacturing

In the U.S., economic activity in the manufacturing sector contracted in September, while the overall economy grew for the 125th consecutive month, according to supply executives surveyed in the Institute for Supply Management (ISM) Manufacturing Business Survey for September.

ISM chair Timothy R. Fiore said the September Purchasing Manager’s Index (PMI) was 47.8 percent, a decrease of 1.3 percent from the August reading of 49.1 percent. This is the lowest reading since June 2009, the last month of the Great Recession, when the index registered 46.3 percent.

“The PMI contracted for the second straight month,” Fiore said. “The contraction continues six straight months of softening in manufacturing.”

A reading above 50 percent indicates that the manufacturing economy is generally expanding, while a reading below 50 percent indicates that it is generally contracting.

The New Orders Index registered 47.3 percent, an increase of 0.1 percent point from the August reading of 47.2 percent. Fiore said aside from last month, this is the lowest reading since June 2012, when the New Orders Index registered 47.2 percent. The previous low point was 46 percent in April 2009.

Of 18 manufacturing industries, declines in new orders were led by apparel, leather & allied products, and textile mills.

ISM’s Production Index fell 2.2 percent to 47.3 percent compared to the August reading of 49.5 percent. Prior to this month’s reading, the previous low point was in April 2009, when the index registered 36.7 percent. Apparel, leather & allied products, and textile mills were among the top three sectors reporting declines.

The Supplier Deliveries Index registered 51.1 percent, a 0.3 percent decrease from the August reading of 51.4 percent, and the 43rd straight month of slowing supplier deliveries.

Respondents noted increased difficulty in transporting products from China and more difficulty in planning for road freight transit times, Fiore said. Textile mills led the group of nine industries reporting slower supplier deliveries in September.

The ISM Prices Index rose 3.7 percent to 49.7 percent in September, indicating raw materials prices decreased for the fourth consecutive month. Five of the 18 industries reported paying increased prices for raw materials in September, including textile mills, while 12 industries reporting a decrease in prices for raw materials in September, led by apparel, leather & allied products.

“Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019,” Fiore added. “Overall, sentiment this month remains cautious regarding near-term growth.”