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New IHS Markit global trade forecasts the most challenging year on record
25 September 2020Tomasz Brodzicki, Ph.D.
Key findings
In all monthly-reporting states, the contraction in exports
year-on-year in the period January-May 2020 equal -13.5% with
values for April and May showing a roughly 25% contraction
According to the new release of the IHS Markit GTA Forecasting model
global merchandise trade is likely to go down in 2020 to USD 16,672
billion or by 12.2% year-on- year
The estimated contraction in global trade value for the entire
2020 is close to the results reported by the OECD and IMF and close
to the estimated optimistic scenario of the WTO from April
2020
We predict a less sharp recovery in 2021 and predict a
year-on-year increase in the real value of trade of 5.6% in 2021.
The predicted CAGR for the period 2021-2030 is higher than earlier
projections and equals 3.5%
The expected recovery, can be strong enough to bring trade
close to its pre-pandemic trend (2011-2019) but only around
2030
Security issues are going to be taken more seriously and are
likely to modify decision making of MNEs and thus could affect
their location choices leading to the reconfiguration of
GVC/logistic chains
We are likely to see a trend towards onshoring or backshoring,
more nearshoring, and thus the transformation of GVC towards more
regionalized value chains
The short and long-term impact of COVID-19 on trade and
trade patterns
After an already sluggish 2019, 2020 proves to be the
most challenging year on record for the global economy. The
COVID-19 pandemic destroyed hopes for a strong global
upturn.
By mid-September according to WHO the number of confirmed cases
reached 30.7 million globally and the number of deaths is
approaching one million. From 14 through 20 September, there were
almost two million new cases of COVID-19, which represented a 6%
increase compared to the previous week, and the highest number of
reported cases in a single week since the beginning of the
epidemic.
COVID-19 pandemic is the worst health crisis in more
than a century and potentially without precedent if we
take the globalized nature of the current economy. It a
simultaneous supply and demand shock that led to the global
recession and unprecedented contraction in global trade (affecting
both the export potential of nations and their demand for imports).
The contraction is by now far larger than the effects of the global
financial crisis in 2008-09 (referred to as the Great Trade
Collapse) or any other recent health crisis (e.g. SARS, Ebola, or
MERS). The first top economy adversely affected was China followed
by other East Asian countries and India, the situation then
deteriorated globally in March in line with the spreading
pandemic.
The contraction in trade continued well into Q2 with most
countries reporting massive declines with April/May being the worst
months on record. Without any doubt, Q2 of 2020 was the
worst quarter on record for global trade and this is very likely to
apply to 2020 as a whole.
The direct trade effects are related to direct supply
disruptions hindering production (local/regional lockdowns / forced
production stoppages), increased transport cost due to
implementation of stricter rules, supply-chains contagion effect
which amplified the direct supply shocks (manufacturing sectors in
less-affected nations found it harder and more expensive to acquire
the necessary imported inputs from the hard-hit nations) and
finally to demand disruptions due to a decrease in the aggregate
demand (recession), and precautionary or wait-and-see purchase
delays (delayed purchases & investments).
Countries most adversely affected are the nations struck the
most by the pandemic itself as well as countries most dependent on
the trade with these nations through export/import linkages
(forward/backward linkages in global value chains, GVCs). Increased
defragmentation of production chains and certain management
principles (just-in-time and lean production with low stockpiles of
inputs) increased the susceptibility of the global economy to the
shock.
The impact is, however, asymmetric due to the nature of the
individual (sector-level) value-added chains. Some GVCs dependent
on adversely affected regional or global hubs such as China, Italy,
Spain, or Germany were more affected (e.g. automotive industry,
electronics). Some industries or sectors gained in the crisis (e.g.
pharmaceuticals, IT services).
Global uncertainty levels skyrocketed with an adverse impact on
financial markets. Increased uncertainty and falling demand
decrease the level of investments by firms which could have dire
dynamic consequences (lower accumulation, lower growth rates).
Individual countries and groups of countries once again took
unprecedented steps to mitigate the crisis, which could have
similarly to 2007-08 negative consequences for public finances and
global debt levels. This increases the probability of the W-shape
scenario (the initially assumed V-shape with a strong recession
followed by sharp recovery is already highly unlikely).
The pattern of trade collapse reflects the spread of the
pandemic and the steps taken by individual states. It is evident
that the overall impact will depend critically on the duration,
severity, and spatial pattern of the pandemic. The remedy would be
the introduction of a successful vaccine or global herd
immunity.
Unfortunately, the spread of COVID-19 resembles the infamous
Spanish Flu pandemic of 1918-19 that lasted two years and had three
major waves with the second one particularly sinister. The incoming
data provides the first signs of the second wave in a growing
number of countries. The economic impact will now depend on actions
taken by states - judging from the overreaction in spring they are
unlikely to introduce tough and economically harmful measures
unless the situation significantly deteriorates (e.g. Israel
recently has reintroduced a three-week long national lockdown).
We already understand that the impact of a pandemic won't be
limited in the short run - it will have long-term consequences as
well. We are likely to observe more pronounced adjustments to
GVC/trade patterns (trade diversion effects) the larger, the longer
the pandemic lasts.
It has already led to an acceleration in digital transformation,
adjustments in work patterns, and an increase in the role of RPA/AI
in numerous sectors. Health security issues are going to be taken
more seriously are likely to modify decision making of MNEs and in
particular, this could affect their location choices and thus lead
to the reconfiguration of GVC/logistic chains. We are likely to see
a trend towards onshoring or backshoring, more nearshoring, and
thus the transformation of GVC towards more regionalized value
chains. Reversal from globalization is however unlikely.
Global growth forecasts
The growth rate of global real trade value is highly correlated
with the growth rate of global real GDP. At the moment of crisis,
trade reacts, however, to a greater extent that the GDP itself thus
the downturns and recoveries are more pronounced. In general, trade
reacts with more volatility to significant macroeconomic shocks in
comparison to global production or GDP.
The data from the quarterly perspective show evidence that the
current global crisis related to the outbreak of COVID-19 caused by
SARS-Cov-2 has more severe consequences for the global economy that
other recent pandemics such as SARS or MERS and has a more severe
impact than the global financial crisis of 2007-08.
The most recent GDP quarterly forecasts of the IHS Markit
Comparative Industry division show that the decline should have
reached the bottom in Q2 2020 with a strong recovery predicted now
for 2021 Q2 (a delay by a quarter). Thus, at yearly time intervals,
we are likely to see the V-pattern of the crises assuming we can
bring the pandemics under control within 2020. If, however, other
waves of the pandemic materialize, then different, more negative
scenarios would have to be adopted with a U-shape or W-shape
emerging.
The forecasts for the top ten economies indicate that China is
the only economy already growing in 2020. India should recover in
the Q1 of 2021 followed by other economies. It is also worth
stressing that the current crisis, in contrast to prior health
crises, is mostly driven by the group of the advanced economies
responsible for most of the global trade and manufacturing
production thus the impact is significantly larger. Emerging states
with lower levels of participation in the global economy and global
value chains are likely to be less affected.
Trade in the Q3 and Q4 2020 - what are PMI new export
orders showing?
The PMI new export orders adjusted have collapsed in April and
May 2020 with prior levels already below the benchmark value of
50.0 points indicating a major contraction in global manufacturing
and services trade. The readouts reached 21.8 and 29.9 for services
and 27.1 and 32.3 for manufacturing. The values were significantly
beneath the 2008-09 readouts for both global manufacturing and
services showing the actual depth of the crisis and the impact on
market confidence. From May onwards they are, however, on the
increase.
World merchandise trade 2020-35
Our new forecast (released on 31 August 2020) incorporating all
the new incoming data shows that global merchandise trade
is likely to go down in 2020 to USD 16,672 billion or by 12.2%
year-on-year (it is an improvement on the previous
forecasted values of 16,397.6 billion and a decrease of 13.6%
year-on-year). Our estimated contraction in global trade
value for the entire of 2020 is close to the results reported by
the OECD and IMF and close to the estimated optimistic scenario of
the WTO from April 2020.
We now predict a less sharp recovery in 2021 and predict
a year-on-year increase in the real value of trade of 5.6% in 2021
and 7.9% in 2022. The predicted CAGR for the
period 2021-2030 is however now higher and equals 3.5%
(priorly it was predicted to be equal to 2.8%). This is
more optimistic and largely depends on the non-materialization of
the double-hit scenario in case of a severe second or third wave of
the pandemic. The pattern is more of a U shape than a V
shape.
Our forecast is close to the "optimistic" scenario for the
development of world merchandise trade published by the World Trade
Organization. The expected recovery (in 2021/2022), can be strong
enough to bring trade close to its pre-pandemic trend (2011-2019)
but only around 2030.
The plunge in trade in 2020 in terms of real value puts the
global economy at 2012 levels. The fall in trade in Q2 2020 is the
highest on record.
The effect in comparison to our last forecast is mostly due to a
shift in macroeconomic forecasts delaying the recovery in terms of
real GDP growth rates for most of the states to Q2 of 2021 or by a
quarter.
In terms of volumes, we now expect global trade in 2020 to go
down to 12.8 billion metric tons and to increase to 13.5 billion
metric tons in 2021 and 14.9 billion metric tons in 2022. Thus, we
expect a decrease of approximately 10.7% in the global volume of
trade in 2020 and the recovery in the forthcoming years with growth
rates of 5.4% year-on-year in 2021 and 10.2% in 2022. We thus
predict the recovery to be more elongated and postponed to
2022.
The forecasts should be treated with a large degree of caution.
Economic developments will critically depend on the shape of the
pandemic curve that at this stage cannot be fully predicted actual
results could differ to our forecasts. A strong second wave of the
pandemic can force us to accommodate a double or triple hit
scenario. The next three months will be crucial and could lead to a
modification of our forecast in the next release (Nov 2020).
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