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Trade in 2020 - the initial results and possible scenarios forward
22 May 2020Tomasz Brodzicki, Ph.D.
Key points:
After an already sluggish 2019 a major upturn was
expected in global trade in 2020; COVID-19 pandemic, the biggest
black swan in a century, destroyed it
World merchandise trade is expected to fall in real
value by 13.6% in 2020 due to the COVID-19 pandemic
A major recovery in trade is expected in 2021; its
actual size will depend on the severity and the actual duration of
the outbreak and the effectiveness of the policy responses
worldwide
The pandemic is affecting all regions; however, the
severity of the impact is asymmetric with Europe being hit the
hardest
The available Q1 2020 results from the IHS Markit Global Trade Atlas
as reported by national sources point to a significant and
asymmetric shock in the first quarter of the year
PMI new export orders adjusted for most of the states
in April 2020 is significantly below the 2009 levels indicating the
size of the downturn; as the most prominent leading indicator it
points to the possible bottom in Q2 2020
The impact on trade will be larger on sectors
(products) with more complex and geographically dispersed forward
and backward linkages in the global value chains
(GVCs)
The impact will be direct due to restrictions on trade
and production imposed as well as indirectly due to the impact on
global demand
The impact is not restricted to merchandise trade only;
certain services sectors, such as passenger air transport, will be
more adversely affected
We now expect the value of global trade to reach USD
16,397.6 billion in 2020 (down by USD 3,037.1 billion in comparison
to our last forecast) and the volume of global trade to fall to
12.1 billion metric tons
The V shape recovery is expected; however, the trade
levels are unlikely to reach the pre-COVID-19 path with a permanent
gap in the trajectory of approx. 1.8 trillion USD and CAGR of 2.8%
for 2021-2030; the forecasted average growth rate is very similar
to our previous forecast
Our forecast is closer to the "optimistic" scenario of
the recent trade forecasts provided by the World Trade
Organization
Main report
After an already sluggish 2019, a major upturn was expected in
global growth and trade in 2020. As can be seen, the real trade
value never recovered to the pre-financial crises' trajectory. The
trend for 2010 - onwards was significantly below the prior
trajectory. Our prior forecast predicted it to be above the CAGR
2010-19 and global trade to reach 25.2 trillion USD in 2029.
COVID-19 pandemic, the biggest black swan in a century, destroyed
it. Global trade collapsed in Q1 of 2020 though asymmetrically. The
Q2 2020 results are likely to be much worse. We are very likely to
find ourselves on a new trajectory - flatter than the preceding one
and with a significant and increasing gap.
This year global economy is driven by the path of the pandemic
and the policy response actions of individual countries as well as
multinational organizations. Social distancing requirements,
restrictions on the movement of people, stricter rules on goods
transport, and forced production shutdowns, mean those whole
sectors of services and manufacturing have been adversely affected.
On the other hand, certain categories of commodities benefit (for
instance IT communication equipment and services due to forces
digital transformations of the whole sector of activities, certain
medical goods, e-commerce, etc.).
The crisis is far from the end with several scenarios still
possible and potential recovery in Q3, Q4, or sometime in 2021 and
unfortunately possible second and further waves of the pandemic
with a vaccine as an only permanent solution. For the time being,
we have to learn how to function with COVID-19 and how to adjust
our businesses, production, and logistics chains. The long-term
impact of this unpredicted event will likely be much larger than
was expected in the early days of this year. The so-called "new
normal" is likely to emerge.
This is a global health crisis on an unprecedented scale
affecting the very core of our globalized economy, disrupting
global value and logistic chains. Despite the prior voices of its
possibility, we, as humanity, were not prepared for it and thus are
trying now to adjust. The unpredictability and uncertainty of the
event make our efforts harder. On the positive note, if we manage
to bring the situation under control, we will be better prepared
for the possible shocks of similar nature in the future.
In the present report, we will try to utilize various data
sources and results of predictive models, provided by IHS Markit
experts, to identify the impact of the pandemics so far and to
present the most possible scenario forward. Taking the uncertainty
linked to the ongoing pandemics, the predictions have to be treated
cautiously.
Trade in Q1 2020
By now, the impact of COVID-19 pandemics on the global economy
is already larger than the impact of similar events in the past -
in particular the outbreaks of SARS and MERS. The decline in the
global economy is likely to be significantly larger than the impact
of the global financial crisis of 2008-09.
Taking into account the different reporting schemes of
countries, using the IHS Markit Global Trade Atlas
monthly data we estimated the trade pattern in Q1 of 2020. Please
note that we only present reporters with full data for the first
quarter of 2020 or two initial months (March data missing) and
compare it to the data in the preceding year. The COVID-19 impact
on exports and imports is asymmetric and that, at least in the
first quarter, there was a significant number of countries showing
year-on-year increases in both exports and/or imports. Among the
worst affected exporters, we have China (mainland), Macau, and Hong
Kong. The impact on Japan or South Korea was much shallower. Out of
Europe, we have Norway, Iceland, and France. Italy has not reported
the data yet. UK, Russia, and Germany suffered a decline of roughly
5%. American and Canadian exports grew year-on-year.
The impact is asymmetric for different types of commodities. IHS Markit Commodities at Sea
data show that no extra adjustment is necessary for dry or liquid
bulk with volumes partially recovering from the initial slump in
January-February this year within the first quarter itself.
Discruption of global value chains
Approximately 70% of international trade today involves global
value chains (GVCs) that are goods or services exported containing
services, raw materials, parts, and components originally produced
in other countries. Some goods are re-exported several times before
reaching the final consumer. The global economy has been
characterized by geographically diversified and fragmented
production structures, widespread outsourcing, and other strategic
linkages resulting in complex interactions among a variety of
domestic and foreign suppliers. The extent of the interactions
differs between commodities. Trade is likely to be more adversely
affected by COVID-19 in sectors characterized by more complex
backward and forward linkages in value chains. The restrictions
imposed on trade and/or production (production outages) cause
supply chains' disruptions which can be only partially addressed by
shifting the production to other, less affected locations. The
dominant paradigm of lean manufacturing and just-in-time approach
with a low stock of parts proved to be very susceptible to the
outbreak.
To accommodate this linkage in our forecast we took into account
the data compiled by OECD in the Trade in Value Added (TiVa)
database. In particular, we tried to identify the potentially most
affected sectors by looking at the share of foreign value-added in
gross exports. It is a foreign value-added intensity measure often
referred to as the import content of exports and considered
generally as a measure of backward linkages in GVC.
The extent of the linkages in the manufacturing sectors proved
to be the largest in chemicals and non-metallic mineral products,
computer, electronic and optical products (electronics), transport
equipment with the automotive industry being most affected
(manufacturing of motor vehicles, trailers, and semi-trailers) as
well as in the manufacturing of basic metals and fabricated metal
products.
Using various commodity-levels trackers we confirmed the impact
on most of the commodities.
Trade in Q2 2020 - what are PMI new export orders
showing?
IHS Markit Purchasing Managers Indices (PMI) new export orders
prove to be a very good indicator of forthcoming trade flows in the
coming two, up to three months. Using the latest readouts from
April 2020 we are thus able to predict the developments in trade in
Q2 of 2020.
The PMI new export orders adjusted have collapsed in April 2020
with prior levels already below the benchmark value of 50.0 points
indicating a major depression. The values are significantly beneath
the 2008-09 readouts for both global manufacturing and services
(even larger than in industry). We are thus likely to suffer the
worst quarter in global trade in decades.
In addition, we show the evolution of the index for the ten
largest economies of the world (responsible roughly for 75% of
global trade) as well as globally and for the emerging economies
over the period October 2019 - April 2020. The lowest readouts for
April 2020 are for India, EU27, and Russia. The highest, still
around 30.0 points, are for Asian economies - China mainland, South
Korea and Japan.
The most recent GDP growth forecasts
accommodated
The relation between the growth rates observed in real GDP and
growth rates observed in trade (exports and imports independently)
at the country level. The multipliers show certain patterns with
their values significantly higher in times of crisis. In general,
trade reacts with more volatility to significant macroeconomic
shocks in comparison to global production or GDP. On the basis of
the most recent GDP quarterly forecasts available in IHS Markit
(published on May 15), we calculated an extra multiplier to reflect
this relationship.
The most recent GDP quarterly forecasts of the IHS Markit
Comparative Industry division show that the decline should reach
its bottom in Q2 2020 with a strong recovery predicted for 2021 Q1
only. 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. And assuming no major secondary waves of the
pandemic. appear. If, however, other waves materialize, then
different, more negative scenarios would have to be adopted with
U-shape or worst the L-pattern emerging.
It is also worth noting that the current crisis is mostly driven
by the group of the so-called advanced economies responsible for
most of the global trade. Emerging states with lower levels of
participation in the global economy and global value chains are
likely to be less affected.
Changes in the GTA Forecasting methodology and
database
Having the opportunity, we would like to stress that in the
current GTA Forecasting release (May
2020), a number of enhancements have been introduced to the GTA Forecasting database. These
include:
Extended range of the forecast until 2035
New historical data edge - the majority of countries have been
updated with the full data for 2019
Upgraded forecasting models (SARIMAX) with additional COVID-19
impact factors (based on the most recent data from GTA, Commodities at Sea, PMI as well
as macro-econometric forecasts from May 2020 as well as
incorporating commodity level trackers and global value-added
chains indicators)
The updated list of exogenous variables by country (real GDP
(for import models), real GDP for rest of the world (for export
models), price deflators, real effective exchange rates, long-term
and short-term interest rates, crude oil price and gas prices as
well as average tariff rates.
World merchandise trade 2000-35
Our new forecast (released on 22 May 2020) shows that world
merchandise trade is likely to go down in 2020 to USD 16,397.6
billion or by 13.6% year-on-year. In comparison to our prior
forecast, it is lower by USD -3,037.1 billion or 18.5%. We expect a
V like shape with recovery in 2021 and predict a year-on-year
increase in the real value of trade of 12.6% in 2021 and 4.3% in
2020. The predicted CAGR for the period 2021-2030 is equal to
2.8%.
Our forecast is closer to the recent "optimistic" scenario for
the development of world merchandise trade published by the World
Trade Organization. However, the expected recovery (in 2021), will
not be strong enough to bring trade close to its pre-pandemic
trend. A new trajectory is likely to emerge.
The plunge in trade in 2020 in terms of real value puts the
global economy at 2012 levels. More importantly, our model predicts
a new lower trajectory of global trade development to 2035
significantly below the priorly predicted levels (in 2030 the
difference is equal to USD 1.8 trillion or 7.5% of its value).
In terms of volume, we now expect global trade in 2020 to go
down to 12.1 billion metric tons and to increase to 13.8 billion
metric tons in 2021 and 14.3 billion metric tons in 2022. Thus, we
expect a plunge of 14.3% in the global volume of trade in 2020 and
the recovery in the forthcoming years with growth rates of 13.9%
year-on-year in 2021 and 3.5% in 2022.
The forecasts should be treated cautiously. They are likely to
be modified in the next release with the inflow of the new data
reported by states. Due to the nature of the GTA Forecasting database and our
modeling strategy we have decided to present the most probable
scenario only. Uncertainty levels are at historically high levels.
As 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.
World merchandise trade by region
The COVID-19 pandemic is predicted to impact different regions
of the world to a different extent and differ between exports and
imports as well as the value and volume. For comparison purposes,
we utilized the WTO definition of regions. We predict the highest
decrease in volumes for Europe (-17.9%) and the South and Central
America, and the Caribbean (-17.4%). North America will be the
least affected (-10.6%).
In comparison to the WTO forecast, we predict a weaker recovery
in 2021 for all the regions with levels of trade both in real
values and volumes not returning to the pre-COVID-19 trends.
*Other regions comprise Africa, Middle East, and Commonwealth of
Independent States (CIS) including associate and former member
States. Asia includes Australia, New Zealand, and Oceania.
