Global Trade: What’s behind the Slowdown?
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Trade growth has slowed since 2012 relative both to its strong historical performance and to overall economic growth. This chapter finds that the overall weakness in economic activity, in particular in investment, has been the primary restraint on trade growth, accounting for up to three-fourths of the slowdown. However, other factors are also weighing on trade. The waning pace of trade liberalization and the recent uptick in protection-ism are holding back trade growth, even though their quantitative impact thus far has been limited. The decline in the growth of global value chains has also played an important part in the observed slowdown. The findings suggest that addressing the general weak-ness in economic activity, especially in investment, will stimulate trade, which in turn could help strengthen productivity and growth. In addition, given the subdued global growth outlook, further trade reforms that lower barriers, coupled with measures to mitigate the cost to those who shoulder the burden of adjustment, would boost the international exchange of goods and services and revive the virtuous cycle of trade and growth.
Global liquidity conditions may have begun to tighten for emerging market economies (EMEs), according to updated data from the Bank for International Settlements. BIS General Manager Jaime Caruana detailed highlights from the latest global liquidity indicators, a measure of the ease of financing in global financial markets, in a lecture at the London School of Economics’ Systemic Risk Centre.
The stock of US dollar-denominated debt of non-banks outside the United States is an important gauge of global liquidity. That stock stood at $9.8 trillion at the end of September 2015, unchanged from the end of June. US dollar-denominated debt of non-banks in EMEs also held steady in the third quarter of 2015, at $3.3 trillion. Q3 marked the first time since 2009 that the measure, which is linked to the strength or weakness of the dollar, stopped increasing. Read more
We re-assess the view that sovereigns with a history of default are charged only a small and/or short-lived premium on the interest rate warranted by observed fundamentals. Our reassessment uses a metric of such a “default premium” (DP) that is consistent with asymmetric information models and nests previous metrics, and applies it to a much broader dataset relative to earlier studies. We find a sizeable and persistent DP: in 1870-1938, it averaged 250 bps upon market re-entry, tapering to around 150 bps five years out; in 1970- 2011 the respective estimates are about 400 and 200 bps. We also find that: (i) these estimates are robust to many controls including on actual haircuts; (ii) the DP accounts for as much as 60% of the sovereign spread within five years of market re-entry; (iii) the DP rises with market exclusion spells. These findings help reconnect theory and evidence on why sovereign defaults are infrequent and earlier debt settlements are desirable.
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