Chapter I: Global Trends and Prospects

A. TOO CLOSE TO THE EDGE

1. A year of serial crises

After a rapid but uneven recovery in 2021, the world economy is in the midst of cascading and multiplying crises. With incomes still below 2019 levels in many major economies, growth is slowing everywhere. The cost-of-living crisis is hurting the majority of households in advanced and developing countries. Damaged supply chains remain fragile in key sectors. Government budgets are under pressure from fiscal rules and highly volatile bond markets. Debt-distressed countries, including over half of low-income countries and about a third of middle-income countries, are edging ever closer to default. Financial markets are jittery, as questions mount about the reliability of some asset classes. The vaccine roll-out has stalled, leaving vulnerable countries and communities exposed to new outbreaks of the pandemic. Against this troubling backdrop, climate stress is intensifying, with mounting loss and damage in vulnerable countries who lack the fiscal space to deal with disasters, let alone invest in their own long-term development. In some countries, the economic hardship resulting from these compounding crises is already triggering social unrest that can quickly escalate into political instability and conflict.

The resulting policy challenges are daunting, especially in an international system marked by rising distrust. At the same time, the institutions of global economic governance, tasked since 1945 with mitigating global shocks, delivering international public goods and providing a global financial safety net, have been hampered by insufficient resources and policy tools and options that are “rigid and old fashioned” (Syed, 2022; Yellen, 2022). Even as growth in advanced economies slows down more sharply than anticipated in last year’s Report, the attention of policymakers has become much too focused on dampening inflationary pressures through restrictive monetary policies, with the hope that central banks can pilot the economy to a soft landing, avoiding a full-blown recession. Not only is there a real danger that the policy remedy could prove worse than the economic disease, in terms of declining wages, employment and government revenues, but the road taken would reverse the pandemic pledges to build a more sustainable, resilient and inclusive world (chapter III).

As noted in last year’s Report, the pandemic caused greater economic damage in the developing world than the global financial crisis. Moreover, with their fiscal space squeezed and inadequate multilateral financial support, these countries’ bounce back in 2021 proved uneven and fragile, dependent in many cases on a further build-up in external debt. The immediate prospects for many developing and emerging economies will depend, to a large extent, on the policy responses adopted in advanced economies. The rising cost of borrowing and a reversal of capital flows, combined with a sharper than expected slowing of China’s growth engine and the economic repercussions from the war in Ukraine, are already dampening the pace of recovery in many developing countries, with the number of those in debt distress rising, and some in default. With 46 developing countries already severely exposed to financial pressure from the high cost of food, fuel and borrowing, and more than double that number exposed to at least one of those threats, the possibility of a widespread developing country debt crisis is a very real one, evoking painful memories of the 1980s and ending any hope of meeting the sustainable development goals (SDGs) by the end of the decade.

The acceleration of inflation beginning in the second half of 2021 (figure 1.1) and continuing even as economic growth began to slow down in the final quarter of the year has led many to draw parallels with the stagflationary conditions of the 1970s. Despite the absence of the wage-price spirals that characterized that decade, policymakers appear to be hoping that a short sharp monetary shock – along the lines, if not of the same magnitude, as that pursued by the United States Federal Reserve (the Fed) under Paul Volker – will be sufficient to anchor inflationary expectations without triggering recession. Sifting through the economic entrails of a bygone era is unlikely, however, to provide the forward guidance needed for a softer landing given the deep structural and behavioural changes that have taken place in many economies, particularly those related to financialization, market concentration and labour’s bargaining power.

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Overall, the value of global trade reached a record level of about US$ 28.5 trillion in 2021, an increase of about 25 percent relative to 2020 and an increase of about 13 per cent relative to the pre-pandemic level of 2019. While most global trade growth took hold during the first half of 2021, growth continued in the second half of 2021. After a relatively slow third quarter, trade growth picked up again in Q4 2021, when the value of global trade increased by about 3 per cent relative to Q3 2021.

Trade in goods and trade in services followed similar patterns during 2021, with stronger increases during the first half of the year. Trade growth continued to be positive for both goods and services in Q3 2021 and especially in Q4 2021.

During Q4 2021, trade in goods increased by almost US$ 200 billion to reach about US$ 5.8 trillion, a new record. During the same period, trade in services rose by about US$ 50 billion to reach about US$ 1.6 trillion, a value just above prepandemic levels. On a year over-year basis, trade in goods strongly outperformed trade in services, with increase of about 27 per cent and 17 per cent respectively. 

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Prior to the pandemic, health and safety measures at ports had focused mainly on accidents and incidents impacting the physical and environmental aspects of safety for port workers. For example, at most ports, it is mandatory for all port workers to wear high-visibility clothing, hard hats, protective footwear and, when near water, lifejackets. However, the rapid spread and severity of COVID 19 led to a surge in worldwide demand for medical grade face masks, sanitizing fluid, dispensers, goggles, disposable overalls and other material with which to protect workers from airborne infections.

In March 2020, the World Health Organization stated that severe and mounting disruption to the global supply of personal protective equipment was putting lives at risk. Ports, like many other sectors, were initially not well equipped to meet the demands for essential supplies of appropriate face masks, sanitizing fluid, disinfectants and other more specialized equipment to protect the health and safety of port workers with regard to COVID-19, nor did they have the necessary processes and procedures in place to manage the move to telecommuting as required by government legislation in many countries. Emergency procedures for ensuring social distancing among work groups to reduce the spread of infection and to isolate symptomatic staff members had to be put in place and plans needed to be drawn up to safely manage the movement of personnel at ports. This was more complicated for essential workers such as ships’ crews, who had to rely on arrangements for accommodation made by shipowners and port authorities. 

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The impact of RCEP on international trade is expected to be significant. RCEP members account
for about 30 per cent of global GDP. Trade in goods among RCEP members was close to
US$ 2.5 trillion in 2019, or about 13 per cent of global trade. RCEP should be instrumental to
advance trade relationships between the economies whose bilateral trade relationships were not
previously regulated by any trade agreement. The RCEP agreement aims to further advance
regional trade by providing members with better market access conditions largely by reducing tariffs
and implementing trade facilitation measures, therefore bringing RCEP countries a step closer to
becoming a regional trading bloc.

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Official statistics for some of the world’s major trading economies further indicate the extent of the downturn in international trade caused by the COVID-19 pandemic. During 2020, none of the major economies has been spared.

China’s trade patterns have diverged from other economies. After falling in the early months of the pandemic, Chinese exports stabilized in Q2 2020 and rebounded strongly in Q3 2020, with year-over-year growth rates of almost 10 per cent. Overall, the level of Chinese exports for the first nine months of 2020 was comparable to that of 2019 over the same period. On the import side, the Chinese demand for imported products recovered following a decline in Q2 2020. Contrary to other major economies, Chinese imports stabilized in July and August then grew substantially in September.

Regional trade trends

The sharp and widespread decline in international trade in Q2 2020 has been similar for developing and developed countries. However, trade in developed countries appears to have fallen marginally faster, both in relation to imports and exports. Trade among developing countries (South-South) has been relatively more resilient with a decline of about 16 per cent in Q2 followed by a decline by 8 per cent in July.

No region has been spared from the decline in international trade in Q2 2020. However, trade in East Asia appears to have fared relatively better than in other regions. This trend is even more evident for the month of July. On the other hand, the sharpest decline has been for the West and South Asia region, where imports have dropped by 35 per cent, and exports by 41 per cent. As of July, the fall in trade remains significant in most regions.

Global trade at the sectoral level

Economic disruptions brought about by COVID-19 have affected some sectors significantly more than others. In Q2 2020, the value of global trade in the automotive and energy sectors was about half of what it was in Q2 2019. Trade also declined significantly in chemicals, machineries, metals and ores, and precision instruments. On the other hand, imports increased in office machinery and textiles and apparel. Such increases are linked to the COVID-19 pandemic as these sectors include home office equipment and protective equipment such as masks.

The data for July and August 2020 indicates similar patterns. The value of international trade in the energy and in the automotive sectors was still substantially below its levels of 2019. On the other hand, increases in demand of home office equipment and personal protective gear resulted in positive growth rates for trade in the communication equipment, office machineries, and textiles and apparel sectors.

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