TRADE MOMENTUM

• The essential headwinds observed concerning global trade are weaker economic activities worldwide, inflation and tightening of monetary policies, disrupted supply chains because of the Russia-Ukraine conflict and financial instability because of the collapse of several financial institutions in advanced economies.
• The ongoing conflict in Eastern Europe continues to have a bearing on the prices of energy, food and commodities.
• As observed by the World Trade Organization (WTO), though food and energy prices receded from their post-conflict peaks by the fourth quarter last year, "they remained high by historical standards and continued to erode real incomes and import demand" during the mentioned period.
• The impact of energy prices was strongest during the winter months in Europe as Russia was among the largest suppliers of energy to Europe before it was sanctioned Europe responded to the loss of gas shipments from Russia by shifting to other suppliers, including the U.S., Qatar, Norway and Algeria.
• This potentially increased LNG prices elsewhere such as Japan, where the prices doubled between January last year to February this year.
• The collapse of financial institutions such as the crypto exchange FTX (November 2022) alongside three banks in the U.S. since March (the Silicon Valley Bank, Signature Bank and First Republic Bank) and the loss of confidence in Credit Suisse added to the troubled scenario.
• As the United Nations Conference on Trade and Development (UNCTAD) in its latest update (in April) concluded, the events raised "the spectre of financial contagion in an already slowing economy.

3. The situation in Europe and U.S.

• The EU is India's third-largest trading partner after the U.S. and China.
• The European Economic Forecast (published in February) held that the region would narrowly escape the recession that took shape around September.
• As for the U.S., in May inflation had "somewhat" moderated since the middle of the last year.
• Nonetheless, inflation pressures continued to run high with expectations of it receding to 2 per cent having a "long way to go".
• The JP Morgan Global Manufacturing Purchasing Managers Index (PMI), compiled by S & P, registered 49.6 in May unchanged for the third consecutive month and indicating a marginal deterioration of business conditions.
• The indicator is used to assess manufacturing business conditions.

4. Relation to trade

• In a period of economic slowdown, international trade, both exports and imports, fall sharply as overall demand for goods and services stands reduced.
• There is an aversion to discretionary spending which particularly weighs on some imports and postponable expenditures.
• It is in this light that the exports of engineering goods, gems and jewellery, chemicals and readymade garments and plastics, along with petroleum products contracted or grew at a slower pace in 2023.
• Similarly, inflation, the uneven rise in prices especially of essentials such as food and energy erodes the purchasing power of an individual.
• Additionally, inflation also affects the flow of capital to a developing country.
• The share of exports of goods and services combined in GDP stood at 21. 4 per cent in FY 2021-22.

• Global demand is not looking good from markets like the EU and the US.
• For the next two-three months, the demand scenario does not look very optimistic adding that the government will initiate interministerial talks to find ways to diversify and sustain the export momentum.
• Global Slowdown, especially in the U.S. which is our major trading partner would have implications on demand for our merchandise exports.
• The high base effect may also be reflected in growing numbers. However, services exports will hold the fort.
• Imports may remain low as commodity prices and INR value stabilise. Quicker recovery may add pressure on import demand.
• As for the concern about lower imports to the non-crude non-jewellery segment that has grown by 15 per cent in the last fiscal higher than the long-term average growth.
• This shows that domestic demand remains robust. A cyclical correction should not be seen as a slowdown.
• Lower imports have been because of stable oil prices, reducing our import bills.