WTOI : World Trade Outlook Indicator Shows Momentum Easing Further In Q3

by Ike Obudulu Posted on August 10th, 2018

Geneva, Switzerland : Trade expansion will likely slow further in the third quarter of 2018, the World Trade Organization’s (WTO) latest World Trade Outlook Indicator (WTOI) – a composite of seven forward looking indices – indicated on Thursday.

The most recent WTOI reading of 100.3 is below the previous value of 101.8 and just above the baseline value of 100 for the index, signaling an easing of trade growth in the coming months in line with medium-term trends, said the WTO in a statement.

“This loss of momentum reflects weakness in component indices including export orders and automobile production and sales, which may be responding to the ratcheting up of trade tensions,” said the WTO in the release.

“Rising trade tensions continue to pose risks to the trade forecast and will be monitored closely going forward,” warned the WTO.

The moderation in the overall WTOI index was driven by export orders (97.2), which have declined steadily over the course of the year, and automobile production and sales (98.1), which have risen slightly recently but remain below trend.

The indices for air freight (100.9) and container port throughput (102.2) remain above trend but growth momentum in both appears to be past its peak.

Electronic components stayed above trend (102.2) while agricultural raw materials (100.1) moved from below trend to on trend.

The World Trade Organization (WTO) Director General wrote in an opinion piece on Thursday on the current global trade situation that global trade is under threat.

“Global trade is under threat. Whether or not you call the current situation a trade war, certainly the first shots have been fired. This calls for our attention, and most importantly, our action,” Roberto Azevedo said.

“The situation is extremely serious. Reciprocal trade restrictions cannot be the new normal. A continued escalation would risk a major economic impact, threatening jobs and growth in all countries, hitting the poorest the hardest.”

He also warned earlier that trade restrictions may become a “new normal” in the near future because it will lead to a drastic decrease in trade and jobs and will have the worst effect on the developing countries which are least able to protect themselves against a trade war.

World Trade Outlook Indicator, WTOI

Designed to provide “real time” information on the trajectory of world trade relative to recent trends, the WTOI provides an indication of trade growth in the near future, complementing trade statistics and forecasts from the WTO and other organizations.

Readings of 100 indicate growth in line with medium-term trends; readings greater than 100 suggest above-trend growth, while those below 100 indicate the reverse.

The WTOI is not intended as a short-term forecast, although it does provide an indication of trade growth in the near future. Its main contribution is to identify turning points and gauge momentum in global trade growth.

As such, it complements trade statistics and forecasts from the WTO and other organizations. Readings of 100 indicate growth in line with medium-term trends; readings greater than 100 suggest above-trend growth, while those below 100 indicate the reverse. The direction of change reflects momentum compared with the previous month.

The WTOI is a monthly index but is released on a quarterly basis for reasons of data availability, since some of the underlying data are quarterly but converted to monthly frequency by interpolation. The WTOI and its component indices measure short-run deviations from recent (i.e. medium term) trends. Recent trends serve as baselines for each index, which are normalized to be equal to 100.

The WTOI is disseminated four times per year, with the precise schedule dependant on data availability and the timing of other WTO statistical releases.

Underlying data for the WTOI and its component indices are obtained from a variety of sources. Data on container shipping are sourced from port authorities, national statistical agencies and industry associations. Data on export orders are sourced from IHS-Markit purchasing managers’ indices. Data on automobile sales and production are sourced from central banks, national statistical agencies and industry associations. Customs data on electronic components and agricultural raw materials are sourced from TDM Trade Data Monitor and national statistics.

Commercial data on international air freight in freight tonne kilometres are provided courtesy of the International Air Transport Association (IATA). Air freight has proven to be a very timely indicator of overall world trade and an early signal of turning points in economic activity.

Rationale for a Trade Outlook Indicator

Data on world merchandise trade in volume terms are often released with long lags or at relatively low frequencies while policy makers, the business community and the general public have a strong interest in more immediate developments in trade. The WTO’s main objective in developing the WTOI was to obtain insights about the current trajectory of world trade (i.e. whether it is above or below trend, gaining or losing momentum, etc.) and to disseminate this information in an accessible format.

The WTOI is not intended as a short-term forecast, although it does provide clues about trade growth in the immediate future. Rather, its main contribution is to identify turning points and to gauge momentum in global trade growth. As such, it complements trade statistics and forecasts from the WTO and other organizations.

What data are included in the WTOI

The WTOI combines several component indices of trade-related data into a single composite index that anticipates turning points in world merchandise trade volume. Component indices are either leading with respect to world trade (that is, turning points in the data occur earlier than turning points in trade) or are available earlier, allowing time-shifted values to signal shifts in trade. The component indices include:

• An index of export orders derived from business surveys covering leading manufacturing economies. Export orders are leading with respect to world trade and are released earlier than WTO quarterly trade volume data.

• An index of air freight sourced from the International Air Transport Association (IATA), which is released earlier than quarterly trade data and which leads trade by two to three months. Air freight has proven to be a very timely indicator of world trade and an early signal of turning points in economic activity (see data sources below for more information).

• An index of container throughput of major international ports in North America, Europe and Asia. Container shipping tracks world trade quite closely and is available earlier than WTO quarterly merchandise trade volume statistics.

• An automotive sector index based on sales and/or production of passenger vehicles in leading economies. Data on automobile sales and production tend to lead business cycles and trade, and are released very early.

• An index of electronic components trade based on customs data in physical units for leading exporting and importing countries. Electronic components trade tends to be moderately leading with respect to world trade.

• An index of trade in agricultural raw materials (mostly wood) based on customs data in quantity terms. Turning points in raw materials trade are very leading but the overall correlation with world trade is not as strong as some of other components.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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