Data from the CPB Netherlands Bureau showed a further fall in world trade in May. Admittedly, the decline in trade so far this year has been smaller than the collapse in GDP might have led us to fear and timelier data are consistent with an improvement in the months ahead. However, the recovery is likely to be slow going.
- Data from the CPB Netherlands Bureau showed a further fall in world trade in May. Admittedly, the decline in trade so far this year has been smaller than the collapse in GDP might have led us to fear and timelier data are consistent with an improvement in the months ahead. However, the recovery is likely to be slow going.
- Following the record 12% monthly contraction in April, world trade volumes fell by a further 1.1% in May. (See Chart 1.) In three-month year-on-year terms, trade plunged by 13.1% – the sharpest decline since 2009.
- On a regional basis, the picture was bleakest in the emerging world. Granted, at 5.9% and 6.2% respectively, the declines in exports from Japan and the US were large. But the further fall in trade this month was biggest in Latin American, African, and Middle Eastern economies where exports fell by over 15% on average. (See Chart 2.) Elsewhere, following very sharp falls in March and April, things started to look up for the euro-zone – exports from the bloc were up by over 10% in May.
- Looking ahead, the timelier data show signs of a tentative recovery. July’s flash PMIs point to a further rise in the new export orders index in the DM manufacturing PMI to around 46.8 – up from 42.7 in June. This is consistent with a small 1% y/y decline in advanced economy real exports, which would be far better than the picture over preceding months. (See Chart 3.) Meanwhile, data from Korea for the first 20 days of July showed that exports continued to recover in working-day-adjusted terms. Indeed, exports from the country were down by 7.1% y/y compared to a far larger 16.7% contraction in June. (See Chart 4.)
- While world trade has plunged this year, the fall has been far smaller than we might have expected given the collapse in global output. On past form, our forecast for global GDP to contract by around 4.5% this year would be consistent with a 35% contraction in trade volumes. But so far this year, global trade has only contracted by around 16%.
- There seem to be two main reasons for this. First, the manufacturing sector has the driving force behind past downturns while the services sector has tended to be more resilient. However, the nature of this downturn has meant that the manufacturing and services sectors have suffered in equal measure. As a result, trade in goods has not fallen as far relative to the collapse in GDP.
- Second, demand has strengthened for virus-related products such as medical equipment, PPE and electronics to facilitate working from home. In China, for instance, the boost in demand for such products meant that exports held broadly steady in June instead of contracting by over 4% otherwise. (See Chart 5.) And this trend appears to have continued. July’s product breakdown for Korea showed that the electronics sector continued to outperform with exports of computer parts and semi-conductors growing strongly.
- Looking ahead, while the slump in external demand has probably passed its trough, we don’t expect a sharp rebound in trade. Admittedly, in China, both exports and imports returned close to their pre-virus levels fairly quickly. (See Chart 7.) But that is consistent with the broader strong rebound there, which we do not expect to be replicated in most countries. And even in China, exports and imports hardly moved in June. And there are downside risks. For one thing, external demand is vulnerable to a resurgence in virus numbers, particularly if consumers are hesitant to resume spending.
- Meanwhile, concerns over the coronavirus and the new security law in Hong Kong mean that we expect the Phase One trade deal between the US and China to be scrapped before the US presidential election in November. While we doubt that will have any immediate impact, if Donald Trump is re-elected, we suspect that a continued escalation of tensions could further limit the pace of improvement in world trade.
- In all, we expect world trade volumes to fall by 11% this year, before a partial rebound of 5% in 2021. (See Chart 8.)
Chart 1: CPB World Trade Volumes
Chart 2: CPB Country Export Volumes (% m/m, May)
Chart 3: DM Mfg. PMI Export Orders & Real Exports
Chart 4: Korea Exports (% y/y, working-day adjusted)
Chart 5: China Exports ($, % y/y)
Chart 6: Korea Trade by Product
Chart 7: China Goods Trade ($)
Chart 8: World Trade Volumes & GDP (% y/y)
Sources: Refinitiv, IHS Markit, CEIC, Capital Economics
Gabriella Dickens, Assistant Economist, email@example.com