Another Global Insurer Predicts Slowdown, Higher Trade Finance Costs

What are the world's trade finance insurance companies seeing that are perhaps not on the radar of some economists and market strategists? After Amsterdam-based Atradius warned that the current upswing in economic growth will be short-lived, Paris-headquartered Euler Hermes says the rebound in global trade could be short-lived as well. 

"In the foreseeable future, the global trade in goods and services is set to grow at half the pre-crisis pace [of 8% in volume and 16% in value]," the insurer's third Global Trade Outlook report concludes. That's because "the number of protectionist measures is high and keeps on rising," financial balkanization remains a concern, and geopolitical tension in the Middle East, Korean peninsula and elsewhere pose additional risk to trade flows.

Losing US$3 Trillion

Global trade lost US$3 trillion in value in the period 2014 to 2016 because of demand shocks and a collapse in commodity prices. Euler Hermes estimates a rebound of 7.5% this year and forecasts another expansion of 6.3% in 2018, effectively recovering the US$3 trillion lost in the contraction.

As a result, Euler Hermes forecasts global GDP growth to accelerate slightly above 3% in both 2017 and 2018 (Atradius estimate: 2.9% in 2017, 3.1% in 2018), for the first time since 2011. The expansion of the global economy could then level off in 2019 and onwards if global trade continues to expand at the same moderate pace.

Positive Boosters

Euler Hermes does espy three potential drivers that could counter the drag from trade protectionism and other negatives.

These are a 3% growth in investment flows in 2018 (supported by a record US$7 trillion in cash currently sitting on corporate balance sheets), smart industrial policies (emanating from China's Belt and Road Initiative, Japan's infrastructure and energy reforms, and regional free trade agreements that are replacing global deals made defunct by Donald Trump), and new trade services and digitalization such as innovative solutions for safer and stronger supply chains, including tradetech.

Warning to Corporates

But in the interim, businesses should brace for higher costs in the coming years. "Monetary policy normalization could impact the availability of hard currency and raise the costs of trade finance across the board," it warns. Funding levels are already contracting. The Asian Development Bank estimates the trade financing gap at US$1.5 trillion annually.