Opinion | Falling global trade and rising debt point to grim outlook for 2024

Not collapsing, just crumbling. That would be a good way to describe the state of the global economy at present, and now that it has begun sliding, it probably won’t be long before it really hits the skids. Then, it’s downhill all the way.

That is not a happy prospect as we approach the new year. However, we need to face reality and accept that China’s property sector is by no means the biggest economic threat in 2024 and that the idea of “ soft landings” elsewhere are an illusion. Legacies of past monetary and fiscal excesses and present economic systemic fragmentation will seriously undermine major economies, causing them to fracture or, in some cases, break.

The latest evidence of crumbling – which, as with discussions of melting glaciers and climate change, can signal a “ tipping point” – is the forecast by a key United Nations body that global trade will contract by 5 per cent this year. Trade and economic growth go hand in hand, especially in export-dependent Asia. Meanwhile, World Bank data suggests that many developing economies are “on a path to crisis” because of high interest rates.

Why would the world tip into recession or slump in 2024 and beyond when it has proved resilient so far to Covid-19, supply chain problems, wars in Ukraine and Gaza, strained superpower relations, inflation and other shocks? Because that is how crumbling develops – incrementally at first, then with sudden acceleration. It is all about lagged impacts, especially on global monetary conditions and now trade. Economic growth will be next.

Many commentators do not appear able to grasp the fact that a headache does not go away when someone stops hitting you on the head with a hammer. The bruising remains, and internal injury takes time to show up.

Global trade has taken a beating from a wave of protectionist policies and restrictive regimes introduced in the name of national security or maintaining technological supremacy. However resilient trade structures might have appeared initially to such shocks, the impact was bound to show through as these restrictive measures multiplied, and that is precisely what is happening now.

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According to the latest Global Trade Update published by the United Nations Conference on Trade and Development, global trade is expected to fall to around US$30.7 trillion in 2023 – a contraction of about US$1.5 trillion, compared to 2022. “Geopolitical trends including declining interdependence between China and the United States are having a growing impact on global trade,” UNCTAD said, adding that the outlook for 2024 is “uncertain but overall pessimistic”.

The World Trade Organization had a more optimistic view in October, when it published its most recent World Trade Outlook update. It forecast that, in volume terms at least, global trade in goods should expand by 3.3 per cent in 2024. The WTO, however, did see “some signs in the data of trade fragmentation linked to geopolitical tensions”. It also pointed to tightening financial conditions contributing to slowing world trade.

What this refers to is a “drying up” process as the global financial system transits from a state of super liquidity to one of relative drought, with credit contracting and debt distress rising. Even if interest rate rises have ceased or paused, that doesn’t lessen the huge debt-servicing burden that rising rates have created.

We will hear more of this in 2024 as debt distress turns to corporate or even country destruction. As the World Bank noted in its latest International Debt Report published on December 13, amid the biggest surge in global interest rates in four decades, developing countries paid a record US$443.5 billion in debt service in 2022. That amount will have ballooned this year.

“Record debt levels and high interest rates have set many countries on a path to crisis,” said Indermit Gill, chief economist at the World Bank. This applies to some corporate and household sectors, too.

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There is an even bigger potential threat in the form of a financial system monster which we have allowed to be created to help buy off economic recession and which is capable of devouring the global real economy.

The dimensions of this monster were sketched graphically by Hung Tran, non-resident fellow at the Atlantic Council. Speaking at the Foreign Correspondents Club of Japan, Tran argued that a gap has developed between the real economy and financial activity in the US and other advanced economies.

Transactions in foreign exchange markets have soared to US$7.5 trillion a day, which he suggested “far exceeds” what is needed to facilitate trade and investment in goods plus financial market transactions. Meanwhile, equity transactions in the US have rocketed to US$85 trillion annually, or more than three times the value of US annual GDP.

“It is not clear how this kind of financial activity helps companies raise funds for their normal activities,” Tran said.

Potential threats in the financial system have a way of crystallising into crises when things are not going well in the real economy, and we are at such a juncture now. Let’s hope that 2024 can avoid an “unhappy new year” outcome.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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