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Closely watched data showed world trade volumes fell at the fastest pace in nearly three years in July, suggesting rising interest rates are starting to affect global demand for goods.
Trade volumes fell 3.2% in July compared with the same month last year, the largest decline since the early months of the pandemic in August 2020.
The latest world trade monitor data released by the Netherlands Bureau for Economic Policy Analysis (CPB) showed that the economy shrank by 2.4% in June, further proving that global economic growth is slowing down.
Following a boom during the pandemic, demand for global goods exports has weakened as inflation rises, central banks around the world hike interest rates sharply in 2022, and domestic services spending rises as economies reopen after lockdowns.
The shift in export volumes has been broad-based, with most countries around the world reporting lower trade volumes in July.
China, the world’s largest exporter of goods, fell by 1.5% year-on-year, the euro zone contracted by 2.5%, and the United States fell by 0.6%.
Sentiment indicators suggest world trade will remain weak in the coming months.
The S&P Global Purchasing Managers’ Index, which tracks new export orders, showed sharp contractions in August and September in the United States, the euro zone and the United Kingdom. Economists now expect euro zone exports to be flat this year, after forecasting a 2% rise at the start of the year.
While interest rates are not expected to rise further in the coming months, the central bank is unlikely to cut borrowing costs until there is more evidence that underlying price pressures are contained.
Analysts believe the lack of credit easing will continue to weigh on exports.
Ariane Curtis, global economist at consultancy Capital Economics, said: “Global trade is likely to suffer as the lagged impact of higher interest rates may have a larger impact on demand for some goods. It will take months to hit bottom.”
Curtis said demand for imports would be weakened the most for goods typically purchased with borrowed funds, such as cars, furniture and capital goods.
Mohit Kumar, an economist at financial services firm Jefferies, said trade is likely to follow the trend of global economic growth, predicting “a slowdown in every major economy in the coming quarters.” “.
In addition to weak economic growth, geopolitical tensions are also taking a toll on trade.
In its latest economic outlook, the Paris-based Organization for Economic Co-operation and Development highlighted how trade restrictions have limited export sales since 2018.
“Geoeconomic fragmentation and a shift towards more inward-looking trade policies will reduce the gains from global trade and affect living standards, especially among the poorest countries and households,” the OECD warned.
The CPB also reported that global industrial production fell 0.1% month-on-month due to sharp declines in output in Japan, the euro zone and the United Kingdom.
U.S. industrial output rose 0.7%, raising hopes of a soft landing for the world’s largest economy, with inflation falling back to tolerable levels without triggering a recession.