A weak start to what will be a dreadful year for world trade - Capital Economics
Global Economics

A weak start to what will be a dreadful year for world trade

Global Trade Monitor
Written by Gabriella Dickens

Whilst the CPB world trade data showed another small drop in February, with lockdowns taking effect across much of the world in March, we expect much sharper falls in the coming months. In total, we expect the coronavirus to knock around a fifth off world trade volumes this year.

  • Whilst the CPB world trade data showed another small drop in February, with lockdowns taking effect across much of the world in March, we expect much sharper falls in the coming months. In total, we expect the coronavirus to knock around a fifth off world trade volumes this year.
  • Following January’s small decline, data published by CPB Netherlands showed that world trade volumes continued to contract in February. In both monthly and 3m y/y terms, trade volumes shrank by 1.5%. (See Chart 1.) Of course, these data are old news since most containment measures outside China did not come into effect until March. But they do nonetheless provide some insight into the impact of the virus. Indeed, in China, export volumes fell by over 2%.
  • And the available timely national data provide some insight into the impact of the coronavirus more recently. Japan trade data for March showed that exports slumped by 11.7% compared to this time last year. And the breakdown offered clear evidence that the containment measures in the EU had started to bite, with exports to the bloc down by over 25%. (See Chart 2.) What’s more, with export growth in India plunging by 35% y/y – the sharpest fall since the financial crisis – the picture there was even gloomier.
  • What’s more, the latest Korean trade data revealed a 27% y/y drop in exports in the first 20 days of April. While the economy’s exports had held up quite well until recently, perhaps due to demand for home electronics from Europe and the US, sinking external demand is now clearly taking a toll. (See Chart 3.)
  • Looking ahead, the survey data point to a sharp decline in world trade volumes in the coming months. At the global level, the new export orders component of the manufacturing PMI for March was consistent with a 4% fall in world trade. And April’s flash estimates for DMs suggest that sharper falls are to come. Indeed, a weighted average of the export orders indices of major advanced economies’ manufacturing PMIs fell to a record low and pointed to a 15% y/y contraction in DM export volumes. (See Chart 4.)
  • While that would be the biggest contraction since the financial crisis, we think that the decline in world trade could be even deeper. As we have mentioned before, given the qualitative nature of the data, the surveys are probably understating the weakness in world trade. In China, for instance, the export orders index was consistent with a smaller drop in trade volumes than the eventual 17% contraction in the hard data across January and February.
  • Our forecast for the world economy to contract by around 5.5% this year appears consistent with a much more dramatic 40% plunge in world trade volumes. As is the case with the survey data, though, this relationship should not be taken entirely at face value. In past recessions, the manufacturing sector has tended to fare far worse than the services sector. But this time around, it is the services sector that is bearing the brunt of the economic collapse. (See Chart 5.) As a result, trade in world goods will probably fall to a lesser extent relative to the decline in GDP. On balance, we expect world trade volumes to decline by around a fifth this year. (See Chart 6.)
  • Further ahead, the experience of China suggests that trade should start to rebound once the virus has been brought under control. Indeed, exports jumped by 50% on the month in March following a 38% plunge in February. (See Chart 7.) And the number of container ships waiting to be offloaded at Chinese ports has dropped back from the sharp spike seen earlier in the year. (See Chart 8.)
  • If the lockdowns start to ease in the second half of the year, trade volumes could recoup much of their losses next year. Of course, much depends on how quickly the restrictions are lifted around the world and the extent of the economic scarring. Indeed, with the industrial sector set to recover relatively quickly, trade in goods should bounce back. But with confidence keeping a lid on consumer spending and some restrictions bound to be left in place, we expect at least some persistent weakness of trade in services, particularly in tourism.

Chart 1: CPB World Trade Volumes

Chart 2: Japan Export Values (% y/y)

Chart 3: Korea Exports Values (% y/y)

Chart 4: DM Mfg New Export Orders &
Real Exports

Chart 5: Global Manufacturing & Services PMI

Chart 6: World Trade & GDP (% y/y)

Chart 7: China Goods Trade
($bn, seas. adj.)

Chart 8: Containers Waiting to be Offloaded
at Chinese Ports

Sources: Refinitiv, IHS Markit, IATA, Intracen, Capital Economics


Gabriella Dickens, Assistant Economist, gabriella.dickens@capitaleconomics.com