World Economic Growth is Slowing

When gas prices start declining at the pump, as they have this fall, that sometimes means that the world economy is slowing. When U.S. exports decline, as they did in September, that sometimes means that the world economy is slowing.

The latest indication of a slowing world economy comes from a November 19 report from the OECD (Organization for Economic Cooperation and Development), Europe's leading economic analytical agency that tracks world economic data. It predicts that, by the time growth is calculated for 2013, world economic growth will increase just 2.7%, down from a 3.1% increase last year. There appears to be a consistent trend of declining world economic growth:

  • 2010 - 4.9% growth
  • 2011 - 3.7% growth
  • 2012 - 3.1% growth
  • 2013 - 2.7% growth

The OECD made a rosy prediction for 3.6% world economic growth in 2014. But last year, at this time, they were predicting that world economic growth would rise to 3.4% in 2013, although it actually fell to about 2.7%. So why is world economic growth slowing?

One reason is the large and persistent trade deficits being experienced by many of the world's countries. Not only do persistent deficits sap jobs and take away investment opportunities from the trade deficit countries, but they eventually cause financial crises in the trade deficit countries which spoil the markets for the trade surplus countries.

For the past two years the southern eurozone countries (France, Italy, Spain, Portugal, Cyprus and Greece) have been enmeshed in trade-deficit caused depressions. According to the OECD report, this will be the second year in a row of negative GDP growth in the eurozone (-0.6% in 2012, -0.4% in 2013).

The problem is that many governments, including those of China, Japan, Taiwan, Russia, Venezuela, South Korea and Singapore have been continuing their mercantilist currency manipulations, trade barriers to imports and/or subsidies to exports, in order to run trade surpluses with their trading partners.

The U.S. trade balance with China continues to worsen. In September, our merchandise trade balance with China set a new negative low of $321.0 billion over the last twelve months, as shown in the following graph:

Federal Reserve Chair Ben Bernanke's response has been to buy U.S. long-term bonds (a strategy called "Quantitative Easing"), which sends private savings abroad, drives down the price of the dollar and drives up the price of some foreign currencies. These factors drove up the price of the currencies of several non-mercantilist "innocent bystander" countries. The resulting trade deficits are now giving those countries financial difficulties. According to the OECD report:

Reinforced by concerns about growth slowdowns and the sustainability of high external [trade] deficits and political tensions in some economies, large portfolio investment outflows contributed to tighter liquidity conditions, sharp declines in bond and stock prices, and sizable currency depreciations. This was especially marked in Brazil, India, Indonesia, South Africa and Turkey, all countries with large external financing needs...

With their new lower exchange rates these "innocent bystanders" will eventually come roaring back. Brazil, as the saying goes, will once again be the country of the future, as it always has been.

The big loser will be the United States. In 2012, we had about a $12 billion trade surplus with these five countries. In 2014, due to their financial problems and lower exchange rates, that small surplus will turn into a large deficit.

The world economy would grow rapidly if the trade deficit countries were to reduce their trade deficits through increased exports to trade surplus countries.  For example, the southern eurozone countries could pull out of the euro and re-adopt their old currencies, and the U.S. could adopt a trade-balancing scaled tariff, a single country variable tariff that rises as the trade balance with a country increases and declines to zero as trade approaches balance. If they took such actions, these countries would jump-start investment in their industries, reduce their unemployment rates and increase their growth rates.

It is possible that in 2014 the mercantilist countries will revive the world economy by ending their currency manipulations, taking down their barriers to foreign products, and stimulating their economies. The People's Bank of China recently announced that it would end its currency manipulations some time in the future, so it is possible that China, if not the other mercantilists, will begin to do so in 2014.

All of these measures are possible, but unlikely. The best prediction is that world economic growth will slow in 2014, just as it did in 2013, 2012 and 2011.

The authors maintain a blog at and co-authored the 2008 book, Trading Away Our Future. Dr. Howard Richman teaches economics online. Dr. Raymond Richman is a professor emeritus at the U. of Pittsburgh and received his economics doctorate from the U. of Chicago. Dr. Jesse Richman is Associate Professor of Political Science at Old Dominion University.