Interpreting the world trade collapse

Quarterly Bulletin 2010 Q3
Published on 20 September 2010

By Silvia Domit and Tamarah Shakir of the Bank’s International Economic Analysis Division.

World trade’s dramatic collapse from the end of 2008 was emblematic of a globally synchronised recession that threatened to become a depression and of a financial crisis painfully transmitted to the real economy. The extent of the fall in world trade relative to that in world GDP and the subsequent strength of the trade recovery so far suggests particular factors have been affecting global trade flows. This article considers the possible reasons for the pronounced fall and recovery in world trade relative to world GDP, focusing on UK export demand. At its core, the extraordinary decline in trade stemmed from the combination of a shock to global demand skewed towards highly tradable sectors and the ever-more globalised production process for these goods. The encouraging improvement in world trade from the second half of 2009 can also be attributed to some of these factors, as well as suggesting that permanent damage to the global marketplace may be less extensive than first feared.

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