The Expert: Global Trade Indicators

On Jan. 28, the International Monetary Fund released a revised “World Economic Outlook Update,” as global economic conditions have deteriorated rapidly since its previous forecast, issued on Nov. 6, 2008. The new forecast takes a particularly pessimistic view even in the current economic climate, significantly scaling back forecasts for global and U.S. gross domestic product growth and global trade. While the new estimates foretell a difficult 2009, long-term data suggest that global trade will rebound strongly as global economic growth stabilizes.The IMF’s 2009 forecast for global growth declined 170 basis points to 0.5 percent, and U.S. projected growth was marked down 90 basis points to negative 1.6%. While significant, these markdowns brought the IMF forecasts more in line with recent consensus estimates. Perhaps more relevant but less publicized, the IMF projects global trade to slow dramatically, cutting its 2009 forecast for global trade by 480 basis points to negative 2.8 percent. This is a monumental change that, if realized, would mark the second-largest annual drop since World War II. (The first largest was in 1975 and driven mainly by oil.) A drop like this would likely impact short-term demand for industrial real estate—trade correlates with domestic demand by about .9—particularly in less supply constrained markets. While short-term demand would suffer under the IMF’s scenario, historical data suggest that trade will bounce back sharply and return to its long-term trend outpacing global GDP by a factor of three-to-one. Reliable data on trade and GDP from the World Bank are available dating back to 1960. In that time, world trade has only contracted twice and trailed world GDP five times; each of these slowdowns occurred during a U.S. recession. Predictably, world trade spiked one to two years after the convergence, typically to around 10 percent, undoing the short-term drops. As the global economy stabilizes over the next few years, a similar jump in world trade can be expected to boost demand for warehouse space. While the near future is uncertain, the long-term drivers of growth for industrial real estate are very much in tact.