World Trade Performance During the Great Recession

The world economy experienced the most severe financial shock during the period of 2008-2009. This period is actually known as great recession period. The result of great recession was a great trade collapse, whereby the global trade declined severely in the beginning of 3^rd quarter of 2008 and 2^nd quarter of 2009 (Eaton et al. 2016). The deepening global recession, high volatility of commodity prices and rising unemployment of 2008-2009 severely impacted the world trade performance level. Apart from that, declined global exports and imports, declined global FDI inflow and outflow and declined consumer demand were directly responsible for the declined world trade during the global recession period (Gawande, Hoekman and Cui 2014). This study will discuss impact of current global recession on the world trade performance. Moreover, the study will focus on India and the impact of global recession on the Indian trade performance. The study will discuss the impact of global recession on the weakening global economic recession. The increasing vulnerability of developing countries during the recession period will also be discussed in this study. On the other hand, the study will highlight the impact of global recession on the trade collapse of India. Furthermore, the study will demonstrate declining global trade and industrial production during the recession period.

The great recession was the period, when the world economy faced severe finical shock during the late 2000s to 2010. Many economists have considered it as the most terrible economic crisis since the great depression of 1930. In the beginning of 2007, a severe financial crisis occurred in the subprime mortgage market in the United State (Lee and Gereffi 2015). Such financial crisis had further developed into full-blown global banking crisis, which led to collapse of investment bank Lehman Brothers in 2008. According to Pentecôte and Rondeau (2015), the Federal Reserve raised the interest rates for protecting the value of dollar. Such high interest rate contributed a lot to the global recession. Sudden loss of confidence on investment and draining of capital out of business led to stock market crash leading to great recession. On other hand, Hong et al. (2017) opined that a slowdown in manufacturing of durable goods has led to declining business progress leading to large scale of financial crisis. Apart from the, the credit crunch and asset bubbles become inflated beyond their sustainable value, which led to large scale of financial crisis.

The GDP of U.S had been fell down by 3.9% from its highest point, actual U.S import fell by 18.6% and real U.S export declining by 15.2% during the period of recession. The concomitant of great recession led to immense trade collapse, whereby the world trade had declined fast during the period 2008-2009. World trade fell in line with economic magnitude like GDP. Moreover, Gkanoutas-Leventis and Nesvetailova (2015) opined that global trade fell by 20% relative to global GDP.

Impact of Great Recession on Global Economy

Figure: Declining World Trade Relative to Global GDP

(Source: Heemskerk, Fennema and Carroll 2016)

In the year 2008-2009 great recession periods, the world trade fell down in real volume by 12.2%. The significant price decline of the primary commodities like minerals and petroleum was responsible for declining in dollar terms by 23%. Abiad, Mishra and Topalova (2014) opined that the recession period of 2008 was also characterized by increased economic downturn, increased unemployment, declined world trade and many more.

The global economic downturn during 2008 recession period was much deeper than expected and the recovery of such economic downturn would be gradual and highly uncertain. According to Tyers (2016), during the second half of 2008, the world economy came to a halt on annualized basis, where the global GDP slowed down by 2% after average growth of 5% over the period 2003-2007. The flows of global trade collapsed in the 3^rd quarter of 2008, where the world export has been projected to decline in 2009.

Figure 2: World Trade in Goods and Services

(Source: Siteresources.worldbank.org 2009)

The contraction of economic activity had sharply been felt in advanced economies, with lowest level of consumer and investor confidence in greater recession period. Drezner (2014) opined that the bold actions of central banks and government in advanced economies facilitated in mitigating the strains in interbank money market. However, such actions were insufficient for addressing the wide interest spreads and reduced access to private sector credit. The damaging feedback loops and of corporate sectors and household sectors led to undermining solvency of banking sectors. The contradicting world trade, reduced market, declined domestic consumer demand and declined access to external financing were responsible for the weakest economic condition during period 2008-2009 (Ferrantino and Taglioni 2014).

Figure 3: Commodity Price Indexes

(Source: Nagengast and Stehrer 2016)

The food and commodity price have come down significantly from their peak during the year 2008. It reflected a sharp downturn of demand for non-food commodities with removal of export restrictions on food product and supply disruption in agriculture.

The convergence of declining economic activity, sharp swings of commodity prices and instability of financial market resulted in increasing vulnerability in developing and emerging countries. According to Unece.org (2010), the sharp downturn of advanced economy and fluctuation of commodity prices affected the fiscal balance and current accounts of developing and emerging countries.

Figure 4: Vulnerability in Developing and Emerging Countries

Declining Global Economic Condition During 2008-2009

(Source: Siteresources.worldbank.org 2009)

The goods importing developing markets having large scale net fuel importers and manufacturing industries were getting benefits from low commodity input prices. However, the countries, which are highly dependent on export of metals, fuels and other commodities, experienced consistent weakening trade success. Bacchetta and Van Wincoop (2016) pointed out that the remittance inflow to the developing countries started to slow down in 3^rd quarter of 2008 with weakening earning growth of the migrant workers and rising unemployment. The overall remittance flow to the developing countries had been projected to decline by 5% to 8% in 2009.

The migration from developing countries slowed down due to global economic down and declining trade. Furthermore, the numbers of foreign employees living in destination countries was unlikely to decrease. Hence, the countries like Middle East, North Africa, Latin America and South Asia, who were highly dependent on remittance flow, were highly affected with this great recession Eppinger et al. (2018). The per capita income of the people had also been adjusted with the declining economic downturn of the countries. Hence, such weakening per capita income has also limited the success level of the world trade with reduced spending power of the consumers. The fuel exporting economies around the world were the hardest hit having average deterioration of overall government balance of 10%.  

Figure 5: Inflow of International Remittance

(Source: Bamiatzi et al. 2016)

Indian economy is largely depended on exporting of goods to foreign markets. Being an export dependent country, India was largely affected by the great recession period. The stumbling industrial growth, diminishing rupee value and reduced foreign exchange led to declining economic condition of India. According to Voxeu.org (2009), the economic instability was a larger hit on the portfolio of Indian economy with acute affect in Indian banks. The availability of global fund is the major driving force for the emerging countries like India. The rise in interest rates and the equity prices slowed down the global funding of the country. However, the slowed down inflow of global funding has less impact on the GDP of Indian economy, as the county hold larger share on its domestic household savings. On the other hand, Claessens and Van Horen (2015) opined that India faced a sudden 15% and 33.33% declination in its export and shipment, which recorded to be a largest drop over.

Approximately, 60% of IT sector’s revenue of India used to come from US suppliers prior to the recession period of 2008. However, during the recession period, the U.S suppliers almost stopped their IT outsourcing process of IT services to Indian, which led to declined growth of Indian IT firms by 2-3% (Singh, Gupta and Verma 2016). Furthermore, Dua and Tuteja (2016) opined that Indian never have had sophisticated financial services industry. Such banks have very less global footprint and used to cater major section of Indian customers. Hence, the collapse of conglomerates and international banks during the 2008-2009 recessional periods had very less impact on Indian financial sectors. The influence of financial crisis and the mental attitude of the investors to take drift of withdraw from risky markets led to liquidity crunch, which ultimately put the stock market of India under huge pressure. On the other hand, Khorana, Perdikis and Kerr (2015) pointed out that India is majorly associated with export in the sectors like software, petroleum products, textiles, chemicals, gems and iron and steel. However, only iron and steel and gems industry were severely hit by the global recession. Hence, the other sectors held up fairly well in India.

Impact of Great Recession on Developing and Emerging Countries

Figure 6: GDP Growth of India during Recession Period of 2008

(Source: Singh, Gupta and Verma 2016)

India escaped from the undeviating severe impact of great recession during the period of 2008-2009, as its financial sectors were very weakly integrated with the international markets. Practically, these banks were unexposed to mortgaged backed securities. However, the real economy of India was increasingly integrated into capital flows and global trades. Indian export had a huge decline in line with the international trade flow (Mittal 2016). Collapsing capital flow, foreign trade and exchange rate movements put out negative influence to Indian Economy.

Figure 7: Exports, India and the World

(Source: Dua and Tuteja 2016)

The exports and imports of India declined with the declination of flows in global trade. While considering the yearly growth rate, the exports of India started to reduce from October 2008 and the imports of India started to reduce from little later around December of the year 2008. For the period of the main recession, the average contraction of imports and exports has been around 20% in 1^st phase and 28% in the 2^nd phase (Singh, Gupta and Verma 2016).

Figure 8: Exports and Imports of India

(Source: Dua and Tuteja 2016)

The Reserve Bank of India pushed up the rate of interest until August 2008 driven by the inflationary concerns. Such preliminary declines were drove to the consequent fall down by global economic recession. Bacchetta and Van Wincoop (2016) opined that the India’s exports have found to be having high income demand elasticity for the exports that makes Indian exports highly sensitive to the movement of GDP. Moreover, the exports were more sensitive to income rather than to price changes.

Figure 9: Major export commodities

(Source: Khorana, Perdikis and Kerr 2015)

The export of petroleum and petroleum products experienced largest contraction, which is around 45%, but the export of agricultural products and allied products found a little reduction of 28%. According to Ferrantino and Taglioni (2014), the oil imports had been growing strongly around 40%, but it faced a decline in growth by 17% during the period 2008-2009. The inflation rate of Indian was likely to reach up by 10% during the recession period. In such situation, the production and manufacturing cost Indian business sectors had increased, which ultimately increased the cost of every industry. The tightening monetary policy of India during the core global recession seems to be a hindrance for the overall national trade of the country. The FDI inflow of India has also experienced a declining trend in the first 3 quarters of 2008-2009.

Impact of Great Recession on Indian Trade Performance

During the recession period, there were important differences among the extent of trade declines by the sectors. Moreover, the prices of some goods were declined quite more than others. Hence, some sectors were influenced more by other sectors. As per Bansal, Jiang and Jung (2015), agricultural products had experienced smallest decline in their prices, while minerals and oil had experienced the largest decline.

Figure 10: Impact of Global Recession of Major Sector Trade

(Source: Drezner 2014)

The above table demonstrates the changes in the sectoral distribution of the export and import trades of Russia. Such changes happened during the 1^st quarter of 2008 and the 1^st quarter of 2009. As per Abiad, Mishra and Topalova (2014), despite of huge decline in the trading value during recession period, the sectoral distribution of trade did not change quit more surprisingly. The sector change in terms of export share was quite little, but the import share was quite greater. More precisely, imports of machinery and consumer durable fell more that imports of non-durables. Lee and Gereffi (2015) pointed out that the geographical distribution of any country’s trade flow would change as per differences in the GDP growth rates of different countries, changes of prices of different goods and changes in demands. The declines with Europe and CIS were specially influenced by great recession, which was generally larger than China and other developing counties. However, the geographical trade shares in terms of import and export shares remained remarkably stable despite of huge disruption in the trade flow.

Figure 11: Impact of Recession on Geographical Distribution of Russian Trade

(Source: Gkanoutas-Leventis and Nesvetailova 2015)

The impact of global recession on world trade was several during the period 2008-2009. According to World Trade Organization, the volume of world trade had reduced by around 12% in the year 2009, back to its 2006 levels. All the G-20 Countries have experienced huge decline in their trade volume. The monthly export of Canada had been dropped by around $10 billion during the recession period of 2008-2009. On the other hand, monthly export of China had experienced a dramatic decline from $140 billion to almost $60 billion (Siteresources.worldbank.org 2009). During the first phase of recession, the world trade had faced modest increase in import restriction. Moreover, the G-20 countries applied these import restrictions on the narrow ranges of products. Moreover, less demand of goods among the consumers led the countries to impose restrictions on import of narrow ranges of products.

Conclusion

Figure 12: World Export and Import during Recession Period

(Source: Wto.org 2009)

During the recession period, the world export declined around 23%, which ultimately reduced overall export revenue of the world. Moreover, due to decline in US and UK economic condition, the appetite for their import had reduced. Hence, lack of demand for the consumer goods and other goods in the developed country had directly influenced the export condition of developing countries.

Figure 13: Export Share of consumption Goods

(Sources: Eppinger et al. 2018)

The value of U.S dollar or its real exchange rate rose during 2008 against a broad group of currencies. As per Bamiatzi et al. (2016), the currency of U.S strengthened during the period of 2008 against those of its trading partners. Moreover, the global financial condition had been intensified with the rise of dollar followed by weakening currencies of other countries. In this way, the prices of primary commodities became highly volatile in the year 2008, which had severally impacted the trade performance all over the world. The prices of primary products like foods and metals fell from their peak in the year 2008. In this way, the inflationary pressure led to weaker demand of goods worldwide, which resulted in reduced production.

Figure 14: Prices of Primary Products During 2008

(Source: Wto.org 2009)

The growth of Merchandise trade was below the average with 5.7% registered during 2008 period. The International Labor Organizations predicted minimum 20 million jobs loss at the end of 2009 financial crisis period. As per the Bureau of Economic Analysis, the unemployment rate of the world jumped from 5% in 2007 to 10.1% in the year 2009 (Drezner 2014). Increasing unemployment rate reduced the per capita income level of the consumers around the world. Hence, demand of goods declined drastically during recession with declining unemployment rate. In this way, the increasing unemployment rate ultimately impacted the world trade several during the recession period.

Figure 15: Unemployment Rate during Recession

(Source: Claessens and Van Horen 2015)

Along with the subsequent worldwide collapse of stock market, production, real estate, access to credit, consumer preferences and world trade, the global flow of foreign direct investment (FDI) started to fall by 16% in the year 2008 (Pentecôte and Rondeau 2015). The FDI declined to further 40%, when the worldwide output in 2009. Despite of bounce back of after sale and profit of affiliates in late 2009, the parent companies wanted to repatriate larger share of profit instead of investing in host countries. The inflow and outflow of FDI started to decline with the credit crunch and recession spreading in the emerging countries. Such declined inflow and outflow of FDI reduced the cash movement around the world, which ultimately impacted the global trade performance.

Conclusion

While concluding the study, it can be said that the great global recession for the period of 2008-2009 has severely impacted the economic and financial condition of the world. Such economic downturn has had tremendous and severe impact on the world trade performance. High interest rate imposed by Federal Reserve on the value of dollars contributed a lot to the global recession. The world trade had declined by 29% in line with the declined GDP rate of the world. The weakening economic environment led to solvency of banking sectors in the developed countries. The food and commodity prices have experienced a severe decline, which ultimately led to reduced world trade. India escaped from the direct several impact of global recession, as its financial sectors were weakly integrated with the foreign countries. However, the exports and imports of India declined around 28% and 20% respectively during the recession period. Furthermore, the tightening monetary policy of India during global recession became a cause of hindrance for the overall global trade performance. In the world trade, the agricultural products experienced small decline in their prices, but minerals and oil experienced the largest decline in their prices. Decreased unemployment rate during the financial crisis period of 2008-2009 reduced the income level of the consumers. Hence, the reduced consumer demand for the goods had reduced the overall trade performance of the world. The global inflow and outflow of FDI also declined 16% in the year 2008, which had severed hindered the overall world trade performance.

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