The latest trade figures from the CPB revealed only a small fall in world trade volumes in January, but export orders from the PMI surveys have since slumped. With the coronavirus plunging the world economy into recession, global trade looks set to fall much further than it did during the financial crisis.
- The latest trade figures from the CPB revealed only a small fall in world trade volumes in January, but export orders from the PMI surveys have since slumped. With the coronavirus plunging the world economy into recession, global trade looks set to fall much further than it did during the financial crisis.
- Though old news, data published today by the CPB Netherlands Bureau showed that after an increase of 0.4% in December, world trade volumes contracted by 1.2% in January. (See Chart 1.) In three-month year-on-year terms, trade volumes contracted by 0.8%.
- Leading indicators had pointed to a stabilisation in global trade at the turn of the year. (See Chart 2.) But with the world economy now falling into recession, any potential for a recovery in global trade has been blown out of the water. Indeed, the country-level CPB data showed that the coronavirus was already having an impact on Chinese exports, which dropped by over 11% in January.
- Admittedly, Korean trade data showed that exports in the first 20 days of March rose by 0.4% m/m, implying that the shock to trade caused by shutdowns in China have already started to ease. (See Chart 3.) But these data need to be taken with a pinch of salt. After all, the resilience of Korean exports in early March will almost certainly prove to be a one-off. During this period, restrictions in China had begun to be lifted, while lockdowns elsewhere either hadn’t been introduced or were just starting to take effect. What’s more, average shipping speeds have fallen sharply and remained low by past standards, indicating prolonged disruption in global container traffic. (See Chart 4.)
- The coronavirus looks likely to deal a larger blow to world trade than the global financial crisis. The new export orders component of the global manufacturing PMI plunged in February to its lowest level since early 2009, consistent with world trade volumes contracting by around 1% y/y. And that was before the virus-related disruption outside China really got going. Indeed, the new export orders indices in the March flash PMI surveys fell to record lows in Japan and the euro-zone, while those in the US and the UK continued to drop sharply. In aggregate, the slump in advanced-economy export orders points to a much deeper contraction in export volumes. (See Chart 5.)
- What’s more, the drop in the global suppliers’ delivery times index last month to its lowest level in nearly nine years provided further evidence of severe dislocation in global supply chains. And again, the flash PMIs for DMs point to those falls worsening in March. It’s worth remembering that a fall in the index reflects a lengthening of delivery times. In normal circumstances, that would be due to heightened demand but in this instance, the fall is the result of disruption to global trading links.
- The financial crisis offers a rough guide with which to gauge the scale of the fallout for world trade in 2020 as a whole. In 2009, world GDP contracted by 0.6% while trade volumes plummeted by nearly 13%. In 2020, we have a much larger contraction pencilled in for the global economy of just over 2.5%. On past form, that suggests that trade volumes will decline by close to 25% this year. (See Chart 6.)
- However, there are at least two reasons why trade volumes may not perform quite so badly relative to the drop in GDP this time around. First, the hit to the manufacturing sector in previous downturns has tended to be larger than that to the services sector, which has disproportionately affected trade in goods. But, on this occasion, virus containment measures are weighing more heavily on the services sector. (See here.) Second, unlike in 2009, world trade is less likely to be restricted by a pullback in the provision of trade finance, since the banking sector appears to be in better shape. So, rather than knocking a quarter off world trade this year, we expect the virus to cause world trade volumes to fall by around a fifth.
Chart 1: CPB World Trade Volumes
Chart 2: World Trade Volumes & Leading Indicators
Chart 3: Korean Export Values (US$ mn)
Chart 4: Average Container Shipping Speed (Knots)
Chart 5: Advanced Economy Export Orders & Volumes
Chart 6: World Trade & GDP (% y/y)
Sources: Refinitiv, IHS Markit, IATA, Capital Economics