Second wave and deglobalisation putting strong recovery of international trade at risk

Summary

• While the sharp contraction in global GDP in 2020 was unprecedented, the corresponding plunge in goods trade was less severe than in the global financial crisis of 2009 (see chart above) . One explanation for this is that the 2020 recession in the industrial sector – where the bulk of traded goods come from – was less pronounced than in 2009. In contrast, the contraction in the services sector – which is more affected by lockdowns – played a more prominent role in the coronavirus recession.
• Whether growth in traded goods will be strong or feeble in 2021 depends mainly on two factors: the strength of the further recovery of the global economy and potential disruptions to globalisation.
• Measured by imports in relation to GDP, globalisation has been stagnating already for several years. We assume that this long-term relationship will remain rather stable (i.e. no deglobalisation but also no further integration). Nevertheless, the short-term outlook for the recovery path of the world economy is highly uncertain. While the baseline forecast sees global trade catch up to the pre-crisis level by the end of 2021, downside scenarios defer the cross-over several years in the future. This could have substantial impacts on the demand for trade credit and marine insurance. 

Worst GDP recession in decades but strong rebound in global goods trade

In the first half of 2020, most of the world’s economies were subjected to their deepest recessions in decades. Government-imposed lockdowns and voluntary social distancing resulted in an unprecedented slump in economic activity. As consumers stayed at home all over the world and factories producing non-essential goods were temporarily shut down in several big economies that are tightly integrated into the global supply chain, the global trade in goods nosedived. But once restrictions were lifted, trade volumes recovered very fast – especially when compared to the dire straits experienced by global trade during the financial crisis of 2008 and 2009. By September 2020, the global volume of internationally traded goods was less than 2% below its pre-crisis level.[1]

The rebound experienced by the global economy as a whole is no less impressive. During Q3, when restrictions in most countries were considerably looser than in March and April, global GDP was only about 4% below its Q4 2019 level, recovering from the -10% trough in Q2 (see chart below, including forecasts by Oxford Economics). Comparing the recent development of the global economy with its path during the global financial crisis (GFC), two features stand out. Firstly, the recession caused by the coronavirus pandemic was far deeper. And, secondly, the post-lockdown rebound during Q3 was stronger than any quarterly growth witnessed during the recovery from the GFC. However, this mechanical rebound has not been enough to get global GDP back to its pre-crisis level.

Back in 2009, global GDP contracted by nearly 2%, and global imports of goods by around 12% (annual averages, in real terms) – that is six times as much. On average, we expect an unprecedented drop in global GDP by 4.2%, and a plunge in trade in the range of 6-9% in 2020, i.e. at worst only about twice as fierce as the fall in GDP.

This time, the contraction of the global industrial sector is less severe than in 2009, and the contraction in services plays a more prominent role

Compared to the GFC, world merchandise trade has been relatively resilient in the face of the coronavirus pandemic. The GFC recession was associated with a sharp contraction in the industrial sector – i.e. the sector which produces the bulk of tradable goods. While global industrial production dropped by 9% in 2009, the fall in 2020 is projected to be about 6%. The collapse in overall economic activity in 2020 mainly hit the services sector, which is less connected to international trade. The service sector is much more dependent on local social interaction and has been more strongly affected by lockdowns and travel restrictions.

How did goods trade volumes rebound so fast? During the Global Financial Crisis, trade finance was disrupted, severely impeding international trade. This, time, there was no financial crisis. The comprehensive liquidity measures taken by central banks limited damage in 2020. Massive fiscal and monetary policy measures propped up the incomes of households and companies, laying the foundations for a strong rebound in demand, including imports.

Another peculiarity of the global coronavirus recession is that China’s lockdown and rebound took place earlier than in other large economies. China’s strong and early recovery cushioned the plunge in global trade in Q2 2020: by that quarter, China’s imports had already recovered, even surpassing the level of Q2 2019. The country’s exports, too, were already recovering from their Q1 fall, benefitting from a strong global pandemic-related demand for export products such as textiles, pharmaceuticals and electronics.

Globalisation has been stagnating for years

As factories were locked down and border controls hampered the trade in goods, some commentators heralded the breakdown of global manufacturing networks and the end of economic globalisation. Global supply chains may have run into trouble during lockdowns but they seem to have been flexible enough to adapt and support the global rebound in production and in merchandise trade. It is important to note that, over the past years, global vertical integration of production seems to have ceased to advance at the speed witnessed in the decades preceding the GFC. The ratio of global goods imports to GDP – a high-level measure of economic globalisation – rose from around 12% in the mid-1980 to nearly 25% right before the GFC (see chart below).

One explanation for trade growing faster than GDP was the stretching of value chains across international borders. Trade flows are measured in “gross terms”, which means that intermediate inputs can be counted multiple times in extended global supply chains.[2] This implies that cross-border supply chains increase the ratio of trade relative to economic activity. After the GFC, this ratio settled in the 20–22% range. It remains to be seen whether the ratio will stay in this range (which is our base case: status quo globalisation, no significant deglobalisation, no significant integration), whether precaution and/or protectionism will drag the ratio down further (slow deglobalisation), or whether free trade agreements such as the new Regional Comprehensive Economic Partnership in the Asia-Pacific region will pave the way to increased integration (regional globalisation). These are scenario sketches of the long-term trend of global economic integration.

Uncertainty of the global economic recovery is still high: range of short-term trade scenarios includes another fall

Given the currently high level of uncertainty regarding the further course of the pandemic and the recovery of the world economy (and, in addition, regarding trade policy: US-China conflict; UK and EU trade relationship), any short-term outlook for global trade needs to make use of a scenario approach. While the speed of the spring and summer recovery in trade volumes might not be sustained, our baseline forecast is that global trade will keep on growing steadily (in line with the slow recovery of the world economy) and reach the pre-crisis level by the end of 2021. In an optimistic growth scenario with a very fast global distribution of effective vaccines and continued fiscal stimulus in large economies, trade could surpass the pre-crisis level already in Q1 2021. In this upside scenario of a faster than expected global recovery with massive pent-up demand, trade volumes might even beat the expectations prior to the crisis. In a pessimistic global second wave scenario, however, lockdowns in large economies could be extended or made stricter (e.g. curtailing work in non-essential manufacturing sectors), and global trade volumes might stagnate or even fall once again. In a downside scenario with a financial crisis, it would likely take several years until the pre-crisis level of global trade will be reached again. This could have substantial impacts on the demand for trade credit and marine insurance.

[1] The global average masks huge differences: Export volumes of China and Latin America had already recovered their pre-crisis level, while volumes from other regions were still below their level of December 2019: euro area (3%), Japan (4%) and the US (9%).

[2] ECB (2016): Understanding the weakness in global trade