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In the past day trading options was not part of most traditional intraday strategies. However, times are changing and today traders make considerable money using options. This page will highlight the benefits and drawbacks of trading on options, as well as covering types of options, how to get setup, and top tips.
Brokers Trading Options
What Are Options?
The straightforward definition – an option is a straightforward financial derivative. This legal contract affords you the right to buy or sell an asset during or within a pre-determined date (exercise date). If you are the seller you have an obligation to meet the terms of the transaction. These will be to either sell or buy if the buyer chooses to ‘exercise’ the option prior to the expiration date.
Options for day trading span across numerous markets. You can get stock options, ETF options, futures options, and more. These traditional options are also known as ‘vanilla options’.
What Is An Option Contract?
You’ll be afforded a number of rights with an options contract. Each contract should include details of the following:
Type of option (call or put option)
Strike price (the price at which you can exercise the option)
Unit of trade (the number of shares)
Expiration date (the last trading day for exercising your option)
Options are often classed as complicated, risky investments, and that puts off many aspiring day traders. However, there are just two main classes of options.
Put – These selling options allow you to sell a stock at a specific price.
Call – These buying options allow you to purchase a stock at a specific price.
Setting aside the two main classes, there is a long list of different markets and options available. Although not all are suitable for day trading, the list includes:
Mini Index options
Options on futures
Weekly SPY options
S&P 500 options
ES weekly options
Deep in-the-money (ITM) options
Crude oil options
The Underlying Asset
Usually, you will find that most options are based upon shares in publicly listed companies, Twitter and Amazon, for example. However, there is a growing number of options based on alternative underlying investments. These include day trading options on stock indexes, currencies, commodities, and real estate investment trusts (REITs).
If you’re interested in day trading stock options for a living it’s important to be aware the contracts are based on 100 shares of the underlying stock. The exception to this rule is when adjustments take place as a result of stock splits and mergers.
The majority of exchange-traded stock options are American. They can be exercised at any point from the purchase date to expiration. European options, however, you can only redeem on the date of expiration.
Options vs Futures
A lot of people swiftly realise there are numerous similarities between day trading options and futures. They are both usually based on the same underlying instrument. The makeup of the actual contracts also shares numerous similarities.
The difference is how they are traded. With options, you get a broader range of available options. You’ll also find the trading rules differ. Options can be traded singularly, or you can purchase them alongside stock trades or futures contracts to create a form of insurance on the trade.
Why Trade Options?
There are a number of reasons you can make serious money trading options. Even putting financial remuneration to the side, day trading with options appeals for several attractive reasons.
Low-cost strategy – Day trading in options gives you the opportunity to enter and exit positions quicker and with less risk than other securities, such as stocks and mutual funds. It’s also significantly cheaper to purchase an option than to buy the underlying asset, the shares of the stock, for example. So, you can control the same number of shares with far less capital.
Diversity – Because options are so much cheaper than buying the actual stock, you can benefit from an increased number of investment opportunities. Your capital will go further, increasing your profit potential.
Greater benefits – When the stock moves you can benefit even more with an option. Let’s say a stock moves from $25 to $50. That would bring you a 100% gain in shares. However, a call option move from $1 per contract to a $5 contract would bring you a 500% gain. Therefore, you can profit more and in less time with an option.
Options can succeed where other sectors fail – Whilst some sectors of the market fail, options can succeed. This is partly because you do not need to exercise your option to profit from it. Plus, volatility itself can be profitable.
Mutually beneficial – Although options are often built on stocks, combine both and they can bring you greater benefits. This is because you can sell your option to create income on the stocks you already own.
Intraday options trading is multi-faceted and brings with it great profit potential. The best part though – accessibility. You can start day trading with options from anywhere in the world. All you need is an internet connection.
Despite the numerous benefits, there are certain challenges that come with trading in options. Fortunately, all the obstacles listed below can be overcome.
Wide bid-ask spreads – In comparison to stocks, the bid-ask spreads are often wider. This is a result of the reduced liquidity found in options markets. This can fluctuate as much as half a point, which can reduce the profit of a day trade.
Price movement reductions – You may find price movement is limited by the time value element of your options premium. Despite the value increasing with the underlying instrument’s price, the gain can be undermined to an extent by the loss of time value. Fortunately, the time value for option day trading is relatively restricted.
Both of these drawbacks shouldn’t prevent you day trading options in the search for income. If you take both considerations into account you can adjust your trading plan accordingly.
How To Start Trading Options
Day trading options for beginners requires following a few straightforward steps.
Open A Brokerage Account
Your broker will help facilitate your traders. Today there are numerous online brokers to choose from. The challenge is finding one that meets your individual needs. You’ll need to consider a number of factors when making your choice.
Costs – Compare the commissions between different brokers. You’ll even find some brokerages that offer zero commission fees for trading options. Also, check their fee structure is straightforward and there are no hidden costs. You must make sure you’re getting competitive spreads.
Account type – Do you want to start day trading options in a cash account, or do you want a margin account? With a cash account, you can only trade the capital you actually have. A margin account, however, will allow you to borrow money from your broker to capitalise on trades. Margin call options will give you increased buying power. It’s worth noting a cash account will only allow you to purchase an option to open a position. You will need a margin account to sell an option without owning the underlying asset.
Platform – This is where you will spend a significant amount of time. The best platform for trading options will offer all the charts and technical tools you need to trade effectively. If you trade whilst on the move you may also want to investigate their mobile and tablet apps.
For more guidance on making the right decision, see our brokers list.
Once you’re set up with a broker and you’ve got your very own trading room ready to go, you’ll need to employ an effective strategy. Strategies for day trading options come in all shapes and sizes, some straightforward and some complicated. Before we look at an example, there are a couple of essential components most strategies will need.
Charts & Patterns
Unless you’re trading using the news, you’ll probably utilise charts and patterns to predict future price movements. They work on a simple hypothesis, that history repeats itself, and you’ll find many a rich trader who agrees wholeheartedly with that statement.
Your chart will require the best indicators for trading options. These vary from strategy to strategy, but they include:
Put Call Ratio Indicator
Money Flow Index
Relative Strength Index
You’ll find that pattern trading with options takes hard work and practice. You’ll need to iron out any creases and try a number of different charts until you find one that paints a clear picture with numbers.
Timing is everything. Not just when you enter and exit the trade though, but also when you set up for the trading day ahead. Options strategies that work usually have a trader behind them who is up bright and early.
For example, you may want to be up as early as 06:00 am ET if you want to get a feel for the direction of the markets heading through Europe and coming into the US open. You can start setting up your trading strategy based on what your market has done throughout the night.
Take the E-mini for example, up to 70% of stocks will move in the same direction as the E-mini. If you know this you can also know if most stocks will open up or down when the US market opens at 9:30 am ET.
It’s worth bearing in mind that the US often dictates the direction of the world markets. So, it’s sensible to wait an hour for the market to settle somewhat before entering your first trade.
Day trading on options requires careful analysis and significant time. Make sure you’re willing to put in the hours if you want to generate substantial profits.
This is one of the basic options strategies that work. If the market is on the rise you will buy calls or sell puts. If the market is on the decline you’ll sell calls or buy puts. Many prefer to sell options than buy them. However, some equities move so well that purchasing the option can yield greater profits than selling the option and waiting for it to go downhill. Apple is one such example.
Let’s go back to the E-mini. You’d be patient in that first hour and then you’d look to see where the E-mini is trading based on its open, and whether Apple is trading in the same direction based on its open.
If it is, you’d buy an at-the-money, or first strike out-of-the-money call if heading higher, or put if heading lower. Now you sit back and wait for half an hour to see if you traded in the right direction. If so, you’d place a stop at half the value of the option you bought. So, if you bought it at $10.00, you’d place the stop at $5.00.
If the market turns then get out. There are plenty more opportunities out there. However, if the trade is looking promising then you’d wait a few hours and re-evaluate at 2:00 pm ET. If the market continues in your direction you could stay with it and place your stop to the other side of the open by around 8-12 cents.
If it continues to look promising you can re-evaluate again at around 3:30 pm ET before the market closes. You can then make a final decision and hopefully count your profits.
For more guidance, see our strategies page.
Tips For Trading Options
Even with nifty options day trading techniques, you can always benefit from invaluable tips. From risk management and stock options tips to education and rules around tax, below you will find top tips that could keep you firmly in the black.
One of the top tips is to immerse yourself in the educational resources around you. The best traders are constantly digesting information. You don’t want to be left behind as the market changes. The Jeff Augen day trading options PDF is available for free download and considered one of the most useful resources out there. However, you should also consider the following:
Books & Ebooks
PDFs (e.g. Tom Demark day trading options pdf)
It can be difficult to resist the urge to throw your hat into the ring early on. However, getting to grips with stock options strategies with a demo account first is often a wise decision. Not only can you iron out any weaknesses in your trading plan, but you can also try your broker’s platform before you buy.
They are funded with simulated money so you don’t have to worry about risking your hard earned capital. Demo accounts are the ideal place for trial and error.
Rules & Restrictions
It’s important you are aware of the rules for day trading options in your country and markets. For example, in the US, there are FINRA day trading rules on options. The rules stipulate that if you meet the ‘pattern day trader’ criteria (trade more than four times in five business days), you must hold an account with at least $25,000. So, if you haven’t got significant capital to start with, then trading may be off the cards, for now.
However, whilst pattern day trading does apply to options in the US, many other countries do not have such barriers.
In other countries, you may need to consider taxes. How will your profits be taxed? Will they be considered as personal income, business income, speculative or non-speculative? Your tax obligations can seriously impact your end of day profits. So, find out what type of tax you will have to pay and how much?
For more guidance, see our taxes page.
One of the best day trading options tips if you’ve got an effective strategy is to consider using automated software. Once you’ve programmed in your criteria, an algorithm will execute trades on your behalf. This can speed up trading times, plus it can allow you to make far more trades than you could manually. However, it’s important to note that this is a tool best employed when you have already nailed down a consistently effective strategy.
For more guidance, see our software page.
Whether you’re day trading using weekly options, or you’re trading daily AAPL options, a risk management strategy is essential. This will help you minimise your losses and ensure you always get another crack at the market.
Many experienced traders advise using a 1% rule. The rule stipulates that you should never risk more than 1% of your account balance on a single trade. So, if you have $40,000 in your account, the maximum position size you would take is $400. Once your strategy turns consistent results then you can consider increasing your risk to between 2-5%.
Take Away Points
As a day trader, you have two objectives. Firstly, make money. Secondly, do so with minimal risk. Options are the ideal instrument for day traders looking for both. When day trading nifty options, you have the ability to set clear limits on risk, and the ability to buy and sell the options multiple times to profit again and again from stock price movements. They offer advantages that other financial instruments simply do not.
On top of that, whether you’re day trading S&P 500 options, or delta and spy options, there are always attractive picks. As popularity for traditional options grows though, it’s important you utilise all the resources around you to assert a competitive edge. That means diving into books and online tools, as well as honing your strategy.
Finally, as Robert Arnott said, “In investing, what is comfortable is rarely profitable.” So, enjoy the road ahead, it may be bumpy, but it could also be lined with gold.
Hopping into Trades Going with the Trend – Examples (3/3 ITM)
The WTO anticipates merchandise trade volume growth of 4.4% in 2020, as measured by the average of exports and imports, roughly matching the 4.7% increase recorded for 2020. Growth is expected to moderate to 4.0% in 2020, below the average rate of 4.8% since 1990 but still firmly above the post-crisis average of 3.0%. However, there are signs that escalating trade tensions may already be affecting business confidence and investment decisions, which could compromise the current outlook.
“The strong trade growth that we are seeing today will be vital for continued economic growth and recovery and to support job creation. However this important progress could be quickly undermined if governments resort to restrictive trade policies, especially in a tit-for-tat process that could lead to an unmanageable escalation. A cycle of retaliation is the last thing the world economy needs. The pressing trade problems confronting WTO Members is best tackled through collective action. I urge governments to show restraint and settle their differences through dialogue and serious engagement,” said WTO Director-General Roberto Azevêdo.
Trade volume growth in 2020, the strongest since 2020, was driven mainly by cyclical factors, particularly increased investment and consumption expenditure. Looking at the situation in value terms, growth rates in current US dollars in 2020 (10.7% for merchandise exports, 7.4% for commercial services exports) were even stronger, reflecting both increasing quantities and rising prices. Merchandise trade volume growth in 2020 may also have been inflated somewhat by the weakness of trade over the previous two years, which provided a lower base for the current expansion.
Until recently, risks to the forecast appeared to be more balanced than at any time since the financial crisis. However, in light of recent trade policy developments they must now be considered to be tilted to the downside. Increased use of restrictive trade policy measures and the uncertainty they bring to businesses and consumers could produce cycles of retaliation that would weigh heavily on global trade and output. Faster monetary tightening by central banks could trigger fluctuations in exchange rates and capital flows that could be equally disruptive to trade flows. Finally, worsening geopolitical tensions could be counted on to reduce trade flows, although the magnitude of their impact is unpredictable. Technological change means that conflicts could increasingly take the form of cyber-attacks, which could impact services trade as much or more than goods trade.
On the other hand, there is some upside potential if structural reforms and more expansionary fiscal policy cause economic growth and trade to accelerate in the short run. The fact that all regions are experiencing upswings in trade and output at the same time could also make recovery more self-sustaining and increase the likelihood of positive outcomes.
Chart 1: Volume of world merchandise trade, 2020Q1-2020Q4 Seasonally adjusted volume index, 2005=100
Source: WTO and UNCTAD, WTO Secretariat estimates.
In recognition of the high degree of uncertainty associated with any forecast under the circumstances, Chart 1 uses shaded bands to illustrate a range of possible trade outcomes in the forecast period. Trade growth in 2020 is most likely to fall within a range from 3.1% to 5.5%. However, it should be noted that the above estimates depend on current forecasts of GDP. Further escalation in trade restrictive policies or other shocks that negatively affect global economic activity could result in trade growth outside of this range. (1)
The WTO’s trade forecasts are predicated on consensus estimates of global GDP, which have been revised upwards strongly in recent months. World real GDP at market exchange rates is projected to grow 3.2% in 2020 (up from 2.8% last September) and 3.1% in 2020. Brighter prospects reflect not only investment and employment gains but also improved business and consumer confidence as measured by OECD business cycle indicators, although these could be undermined by uncertainty going forward. The final figure of 3.0% for world GDP growth in 2020 was also stronger than the previous estimate (2.8% as of last September), which partly explains the fact that actual merchandise trade growth of 4.7% for the year exceeded even optimistic assessments (e.g. 3.6% in September, with a high end estimate of 3.9%).
Despite the improved outlook, some structural factors that weighed on trade in recent years are still present. This includes the rebalancing of the Chinese economy away from investment (which has very high import content) and toward consumption (which has lower import content compared to investment), as well as the reduced pace of global trade liberalization in recent decades. China’s rebalancing might dampen imports slightly in the short-run but it should produce stronger, sustainable growth over the long term, which would support more trade. On the other hand, the lack of further substantive liberalization would be expected to produce subdued trade growth in both the short and long-run.
Historically, world merchandise trade volumes have grown around 1.5 times faster than world real GDP at market exchange rates. The ratio of trade growth to GDP growth (referred to as the “elasticity of trade with respect to income”) rose above 2.0 in the 1990s, but fell back to 1.0 in the five years following the financial crisis (2020). This elasticity measure rebounded from 0.8 in 2020 to 1.5 in 2020, which is close to the historical average. Stronger trade growth relative to GDP growth is expected to continue at least into 2020, barring major economic shocks (Chart 2).
Preliminary data suggest that trade is off to a strong start in 2020. The WTO’s most recent World Trade Outlook Indicator (February 2020) pointed to above-trend trade growth in the first quarter, while other indicators such as export orders and container shipping are also suggestive of an ongoing recovery. Tighter labour markets and modest increases in inflation in major economies will leave less room for error on the part of policy makers, but absent any missteps trade growth should remain strong over the next two years.
Chart 2: Ratio of world merchandise trade volume growth to world real GDP growth, 1981-2020 % change and ratio
Source: WTO and UNCTAD for trade, consensus estimates for GDP.
Details on trade developments in 2020
The acceleration of world merchandise trade volume growth to 4.7% in 2020 from 1.8% in 2020 was broad based, driven by rising import demand across regions but most notably in Asia. The largest gains were recorded on the import side in developing economies, where trade growth surged to 7.2% in 2020 from 1.9% in 2020. Import demand also picked up in developed countries, albeit less dramatically, as merchandise trade growth in volume terms increased to 3.1% in 2020 from 2.0% in 2020. Meanwhile, merchandise exports grew 3.5% in developed countries and 5.7% in developing countries last year, up from 1.1% and 2.3% respectively in the previous year (Table 1).
Although merchandise trade volume growth was stronger in developing countries for the whole of 2020, exports and especially imports of developed countries strengthened over the course of the year while trade growth in developing economies was more stable. This is illustrated by Chart 3, which shows seasonally-adjusted quarterly merchandise export and import volumes by level of development. Year-on-year growth of imports was considerably stronger in developed countries in the second half of 2020 (4.3%) than in the first half (2.3%), while growth eased slightly in developing economies (6.0% in the second half, down from 7.2% the first half). Export volume growth in developed countries also increased from 3.4% to 4.3% between the first half and second half, while growth in developing countries picked up slightly from 5.2% to 6.4%.
Chart 3: World merchandise exports and imports by level of development, 2020Q1-2020Q4 (Volume index, 2020Q1=100)
Source: WTO and UNCTAD.
The recovery of merchandise trade volumes in 2020 was widely shared across regions but this was especially true on the export side, where North America, South and Central America and the Caribbean, Europe and Asia all recorded stronger growth. Asia and North America saw steady year-on-year growth in imports throughout 2020, whereas import growth accelerated over the course of the year in Europe (1.4% in the first half, 4.1% in the second half) and South and Central America and the Caribbean (1.5% in the first half, 6.6% in the second half, see Chart 4).
Asia had the fastest trade volume growth of any region in 2020 on both the export side (6.7%) and the import side (9.6%) following two years of tepid expansion (Table 1). North American exports and imports rebounded strongly in 2020 with growth of 4.2% and 4.0%, respectively, after stagnating in 2020. South and Central America and the Caribbean’s import growth turned positive again in 2020 with an increase of 4.0%, following three years of steep declines. Meanwhile, European trade flows continued to expand at a moderate pace, with growth of 3.5% for exports and 2.5% for imports in 2020.
“Other regions,” encompassing Africa, the Middle East and the Commonwealth of Independent States, saw steady export growth of 2.3% in volume terms due to the fact that demand for oil and other natural resources tends to be quite stable in quantity terms. Meanwhile, imports of the combined regions increased slightly by 0.9%, partly as a result of higher primary commodity prices, which raise export revenue in resource exporting countries and allow more imports to be purchased. Energy prices more than doubled since January 2020, but even at nearly US$70 per barrel oil prices still remain below the US$100 level that prevailed before the middle of 2020.
Chart 4: Merchandise exports and imports by region, 2020Q1-2020Q4 Volume index, 2020Q1=100
a Refers to South and Central America and the Caribbean b Other regions comprise Africa, Middle East and the Commonwealth of Independent States, including associate and former member States. Source: WTO and UNCTAD.
Asia was responsible for much of the recovery of world merchandise trade in 2020 on both the export and import sides. This is illustrated by Chart 5, which shows regional contributions to world trade volume growth. On the export side, Asia contributed 2.3 percentage points to global growth of 4.5% in the latest year, or 51% of the total increase. Asia also added 2.9 percentage points to world import growth of 4.8, or 60% of the overall increase. North America made substantial positive contributions to exports and imports as well, after adding very little to trade growth in 2020 as internal and external demand faltered. Europe added less to merchandise import growth in 2020 than it did in 2020, but South and Central America and the Caribbean made a positive contribution for the first time since 2020 as Brazil exited its recession.
Chart 5: Contributions to world trade volume growth by region, 2020 Annual % change
a Other regions comprise Africa, Middle East and the Commonwealth of Independent States, including associate and former member States. b Refers to South and Central America and the Caribbean Source: WTO and UNCTAD.
No single factor can explain the revival of world trade in 2020 but several contributed to it, including increased investment spending, which is highly correlated with trade, and higher commodity prices, which raise incomes in resource-based economies and encourage investment in the energy sector, e.g. shale oil in the United States. Appendix Chart 1, which shows GDP growth by expenditure component in selected economies, illustrates recent trends. Investment made a negative contribution to GDP growth in the United States in 2020 and negligible contributions to growth in Japan and the United Kingdom for the year, but all three saw investment rebound to varying degrees in 2020. Investment is important for trade because it is thought to be the most import intensive component of GDP, followed by exports, private consumption and government spending. (2)
The fluctuations in the United Kingdom may have been partly due to the uncertainty introduced by the Brexit referendum, and the fact that this uncertainty was partly alleviated in 2020. However, the long-run impact of Brexit on trade and investment remains to be seen.
Appendix Chart 1 also shows that China’s economic rebalancing away from investment and toward consumption is continuing, with investment accounting for roughly 32% of GDP growth in 2020, down from 55% in 2020. This development may add some drag to world trade growth as China imports fewer capital goods, but the process has so far been gradual and not very disruptive to global trade. Less investment could also help reduce overcapacity in sensitive sectors such as steel and aluminium, thereby alleviating trade tensions.
Chart 6: Prices of primary commodities, Jan. 2020 – Feb. 2020 Indices, January 2020=100
Source: World Bank Commodity Price Statistics.
Dollar values of international trade flows are strongly influenced by exchange rates and commodity prices. Despite daily ups and downs, the nominal effective exchange rate of the US dollar against a broad basket of currencies was basically unchanged in 2020, while prices for energy, food, raw materials and metals rose between 7% and 24%. This partly explains why merchandise trade growth was stronger in value terms than in volume terms for the year. The dollar value of world merchandise exports was up 11% in 2020 to US$17.20 trillion. World commercial services exports increased by 7% to US$5.25 trillion in the same period.
Appendix Chart 2 shows year-on-year growth in monthly merchandise exports and imports of selected major traders through February 2020. Trade values have been growing at stable rates in most countries since 2020. China and the European Union (28) show an uptick in growth in the early months of 2020 while India and Korea appear to be losing momentum. However, these figures should be used with caution as they may be strongly influenced by fluctuations in prices and exchange rates.
Appendix Tables 1, 3 and 4 provide detailed breakdowns of annual merchandise trade in current US dollar terms by region and selected economies. Resource exporting regions such as Africa and the Middle East recorded stronger export growth than import growth, while industrialized regions such as North America, Europe and Asia had import growth that was as strong as or stronger than export growth. There were few major changes in rankings of merchandise exporters and importers with some exceptions. Counting individual EU members separately, the Republic of Korea jumped from the 8th position to 6th on the export side while the United Arab Emirates rose from 19th to 15th place, the latter reflecting higher petroleum prices. Meanwhile, Japan overtook the United Kingdom as the world’s 4th largest merchandise importer while Canada fell from 9th to 12th place in import rankings. China remained the largest exporter and the United States remained the largest importer regardless of whether the European Union was treated as 28 separate countries or as a single trader, excluding intra-EU trade.
Chart 7: Growth in the value of commercial services exports by category, 2020-17 % change in US$ values
Source: WTO and UNCTAD.
World commercial services trade recorded a strong expansion in 2020 following two years of weak-to-negative growth. This is illustrated by Chart 7, which shows growth in the dollar value of commercial services exports since 2020 by major services categories. Total commercial services exports increased by more than 7% in the latest period, with transport services growing faster than the world average at 8%. The weakest category of services exports was goods related services, which still posted a 5% increase.
Detailed breakdowns of commercial services trade by region and country are shown in Appendix Tables 2, 5 and 6. There were no changes in rank among the top 5 exporters of commercial services when EU member countries are counted separately, whereas the United Kingdom rose to 5th place among importers from 6th previously. There were no changes in rank on either the export or import side with the EU treated as a single entity and intra-EU trade excluded. The United Arab Emirates placed much higher in the global export rankings (12th in 2020, excluding intra-EU trade) than in previous press releases, but this was due to data revisions rather than increased exports. UAE imports were also considerably larger. As a result, ranks of countries in commercial services trade are not fully comparable to previous years.
Outlook for trade in 2020 and 2020
Some leading and coincident indicators of merchandise trade continued to point in a generally positive direction in the first quarter of 2020 while others have taken a negative turn. An index of container port throughput was close to its highest level ever recorded in February (Chart 8), suggesting strong trade growth. However, a measure of global export orders derived from purchasing managers’ indices dipped in March, falling to 51.8, its lowest level since December 2020. A value above 50 still indicates expansion, but the recent weakening could be attributed to rising anti-trade rhetoric (Chart 9).
Chart 8: RWI/ISL container throughput index, January 2020 – February 2020 Indices, 2020=100
Source: Leibniz Institute for Economic Research and the Institute of Shipping Economics and Logistics.
Balanced against these broadly positive signs is a rising tide of anti-trade sentiment and the increased willingness of governments to employ restrictive trade measures. Recent measures have been applied to widely traded goods supplied by a large number of countries, with counter actions promised if these go into effect. An escalating cycle of retaliation may yet be avoided if negotiations manage to diffuse tensions, but this is not guaranteed. As always, the WTO stands ready to help members reach mutually beneficial outcomes.
Chart 9: Global PMI new export orders index, Jan. 2020 – Mar. 2020 Index, base=50
Note: Values greater than 50 indicate expansion while values less than 50 denote contraction. Source: IHS Markit.
Another major risk is an unanticipated hike in inflation in one or more countries, which could cause monetary authorities to raise interest rates precipitously and cause economic growth to slow, with negative consequences for trade. The United States Federal Reserve is already in the process of raising interest rates closer to historical norms while the European Central Bank is moving closer to phasing out its own stimulus measures. Economic forecasters generally expect monetary authorities to manage these challenges successfully, but with less room to manoeuvre some financial volatility could come to the fore if conditions change.
The increased level of policy uncertainty is illustrated by Chart 10, which shows an index based on the frequency of phrases linked to economic uncertainty in press accounts.
Chart 10: Global economic policy uncertainty, Jan. 2005 – Mar. 2020 Index, mean of 1997-2020=100
Assuming current forecasts for GDP growth come to pass, the WTO expects world merchandise trade volumes to increase by 4.4% in 2020, with stronger growth in developing economies in both exports (5.4%) and imports (4.8%). Developed countries should also see fairly strong growth on both the export side (3.8%) and the import side (4.1%). In 2020 global trade growth is projected to moderate to 4.0%, with developing economies still outpacing developed countries in both exports (5.1% compared to 3.1%) and imports (4.4% compared to 3.3%) (Table 1). However, economic activity would also be expected to take a hit from escalating trade restrictions, which could result in more negative scenarios being realized.
Table 1: Merchandise trade volume and real GDP, 2020 a Annual % change
a Figures for 2020 and 2020 are projections. b Average of exports and imports. c Includes the Commonwealth of Independent States (CIS), including associate and former member States. d Other regions comprise Africa, Middle East and Commonwealth of Independent States (CIS). Source: WTO and UNCTAD for trade, consensus estimates for GDP.
Appendix Tables and Charts
Appendix Chart 1: Contributions to GDP growth of selected economies, 2020-17 % change and percentage points
Sources: OECD Quarterly National Accounts for all countries except China, which was sourced from UN National Accounts Statistics through 2020 and the Economist Intelligence Unit for 2020.
Appendix Chart 2: Merchandise exports and imports of selected economies, January 2020-February 2020 Year-on-year percentage change in current dollar values
a January and February averaged to minimize distortions due to lunar new year. Sources: IMF International Financial Statistics, Global Trade Information Services GTA database, national statistics.
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