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The Italian economy

THE NEW FRONTIERS OF FOREIGN TRADE


EMERGING COUNTRIES PLAY A CRUCIAL ROLE IN OVERCOMING THE WORLD TRADE CRISIS


In 2008 the world economy was affected by a strong downturn, triggered mainly by the financial crisis in the summer of 2007 in the United States, which influences many aspects of the global economy. Among the many consequences, one will certainly be a fall in the domestic demand of the advanced countries, linked to the reduction in household consumption. The reduction in employment and the drop in disposable income (not compensated by the decrease in inflation), will also have a negative impact on the situation.

One of the numerous negative effects deriving from this economic scenario is also a slowdown in world trade, with trends similar in all areas, with the exception of NAFTA, which had already shown a negative trend in 2007. According to the report published by ICE (the Italian national institute for foreign trade) and Prometeia, the international trade in goods for the three year period 2008-2010 could close with an average annual growth of 3.5% (at constant prices); combining the variations expected for quantities and prices, one can thus make a forecast of the growth of world trade in euros which would be around 6%, a decrease compared to 2007, when the figure was about 10%. The slowdown in world growth would, therefore, have a limited impact on the level of international trade, thanks to the compensation obtained by the devaluation of the euro. In detail, considering this macroeconomic framework, we can expect to see a very low increase in world trade in 2009 (1% at constant prices), to then reach a moderate recovery in 2010 (4.9% at constant prices), which will not, however, be enough to return to the levels of the five year period 2003-2007.

If for the industrialised countries the effects of the financial crisis have been seen in the arrival of a recession, it is still not clear what will happen in the emerging countries, which in recent years have made a strong contribution to supporting the world economy, above all in international trade. In the scenario outlined in the report, these economies play a fundamental role: it is indeed thanks to the demand from the emerging countries that the negative moment for the world trade in manufactured goods could avoid being transformed into a world trade crisis. The state of the emerging economies has in fact undergone profound changes in recent years, coming to occupy strong positions not only in the supply of manufactured goods on the international market, but also for demand, and it is precisely this phenomenon that could represent the crucial factor for the world economy to avoid a very much more negative situation than the one hypothesised.

As a whole, China, India, Russia, Latin America and the other emerging economies, including those geographically closer to Italy, such as North African and Middle Eastern states, have grown much more than the group of developed countries in the course of recent years, thanks also to their exports to the mature markets. Starting from these facts, some observers think that the emerging economies can today face up to the crisis that the advanced countries are going through; in particular, countries that export raw materials will have a stronger position and even perhaps see an increase in growth. The emerging economies that instead export manufactured goods will see their future linked to their geographical location, with greater probability of suffering from the crisis that has hit Western Europe according to how close they are: countries further away seem, in fact, to be more linked to the fate of the Chinese economy, whose imports support most Asian and South American economies. Nonetheless, the risk remains that these countries will not be able to bear the negative impacts that the countries in crisis force on world demand and that their spending capacity will not be sufficient to support their imports. In particular, if China were to reduce its imports, many economies that are based on them could enter a much more serious crisis than the one faced by the advanced economies at the moment.



IMPORTS OF MANUFACTURED GOODS
(variation at constant prices)
IMPORTS
Source: Foreign trade report, ICE - Prometeia



As far as Italy is concerned, forecasts for the three year period do not promise good news
: according to the ICE - Prometeia foreign trade report, international trade in manufactured goods regarding our country will be affected by negative impacts for the next two years, with a particularly poor situation in 2009 and some signs of recovery in 2010, remaining in line with the forecasts at the global level. However, the situation appears uneven, according to the presence of companies in those emerging markets that will offer a life-line for the world economy and the competitive strength of Italian manufacturing; the variations regarding means of transport for industry and agriculture and industrial machinery are, instead, positive, thanks to the competitive positioning on the markets geographically further away.
In addition, sectors like that of means of transport, although affected by a general crisis for producers, seems to have interesting outlets in the emerging markets, thanks to their new situation of prosperity, just as the electro-mechanic sector could have good prospects on the southern shore of the Mediterranean and in the emerging European countries, such as Poland and Romania. In geographical terms, North Africa and the Middle East are the areas in which Italian firms draw greatest benefit from the economic growth of the various countries, thanks to the intense trade, but the forecasts for world trade see the best opportunities of development in the most distant markets, less linked to the destiny of Western Europe.

The phase of recovery, which has characterised the most recent period, has undoubtedly improved the presence of Italian companies on the international markets, but on its own might not, however, be enough. On the whole, a great effort will be needed for our companies to be put in a position to compete in the most interesting markets: our exports could also exploit the weakening of the euro expected for 2009, and this could support our competitiveness in the markets and sectors in which price is still a significant variable. Avoiding marginalisation and seeking better and fuller integration in the global network is a key problem for our country that needs to be solved. Adequate resources, instruments and policies will be required.


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