April’s world trade data confirmed that coronavirus restrictions have taken a very heavy toll on trade flows. But the damage has been slightly less severe than we had feared and more timely data from early-reporting economies offer hope that the worst is past.
- April’s world trade data confirmed that coronavirus restrictions have taken a very heavy toll on trade flows. But the damage has been slightly less severe than we had feared and more timely data from early-reporting economies offer hope that the worst is past.
- The CPB Netherlands data showed a collapse in global trade in April. Indeed, the 12.1% monthly fall in world trade volumes was by far the largest on record and left the three-month average annual growth rate at -7.9%. (See Chart 1.) On a regional basis, the picture was the bleakest in the euro-zone and the US, where exports had fallen by over 20% m/m. (See Chart 2.) Elsewhere, while trade appeared to hold up slightly better in emerging economies in aggregate than in advanced economies, Latin American countries and Asian countries outside China experienced very sharp falls.
- On the face of it, the sharp contraction in global trade is disappointing after a far smaller decline of around 2.5% in March. But world trade volumes that month were supported by a rebound in China following the removal of many containment measures. Without the support of a continued rebound in Chinese exports, and with most economies in full lockdown, a much sharper fall was inevitable in April.
- In fact, the reduction in world trade so far this year has actually been slightly less severe than the scale of the economic collapse would suggest. Indeed, our forecast for an annual contraction in GDP of around 5% is, on past form, consistent with a 35-40% y/y decline in world trade. So far, the 8% y/y fall has clearly been far smaller. (See Chart 3.)
- We think that there are two key reasons for this. First, in contrast to “usual” downturns where the manufacturing sector experiences sharper declines in output than in the services sector, the collapse in economic activity has been driven by both sectors in equal measure. As a result, the collapse in world goods trade has not been as stark relative to the decline in GDP as it has been previously.
- Second, the coronavirus has boosted demand for certain products including face masks, medical equipment, and electronics. Granted, these products only account for a small portion of trade. (See Chart 4.) But the sharp increase in demand for these goods has clearly offset some of the falls for other goods. In Singapore, for instance, domestic exports rose by 2.5% y/y in April and May. But excluding exports of pharmaceuticals, they would have declined by 3.0% y/y.
- And in China, face masks, drugs, medical equipment, and work-from-home gear made up only 3% of exports last year but 14% of exports in May. Without that boost, Chinese exports would have contracted by over 10% y/y last month – far greater than the actual 3.3% decline. (See Chart 5.)
- Looking ahead, there are signs of a tentative recovery. While the new export orders component of the PMI is still consistent with contractions in world trade of around 4% y/y, it suggests that the decline in global trade volumes slowed in June. (See Chart 6.) What’s more, timely data from Korea showed that exports fell by 16.2% y/y in working-day-adjusted terms during the first 20 days of June, an improvement from the 23.6% contraction in May. (See Chart 7.)
- But the recovery will be limited by persistent weakness in demand. There is already evidence of this in China. Following the initial sharp rebounds, exports dropped back in May as weaker global demand took a toll. (See Chart 8.) What’s more, with lockdowns slowly being lifted and the need to stockpile the likes of face masks and other personal protective equipment diminishing, that trend could be exacerbated as global demand for COVID-related products eases.
- Meanwhile, there is a chance that the latest setbacks around the US-China trade deal could be the start of a greater resurgence of trade tensions. This, in turn, could end up weighing on trade further ahead.
Chart 1: CPB World Trade Volumes
Chart 2: CPB World Export Volumes Country breakdown (% m/m)
Chart 3: World Trade Volumes & GDP (% y/y)
Chart 4: Exports of COVID-related products (% of GDP, 2019)
Chart 5: Chinese Export Values (% y/y, latest = May)
Chart 6: DM Mfg. PMI Export Orders & Real Exports
Chart 7: Korea Exports (US$bn, working-day adjusted)
Chart 8: China Goods Trade ($, % y/y)
Sources: Refinitiv, IHS Markit, CEIC, Capital Economics
Gabriella Dickens, Assistant Economist, email@example.com