Early last month, the World Trade Organization warned that world merchandise trade is set to plunge by between 13% and 32% in 2020 due to the pandemic.
“Nearly all regions will suffer double-digit declines in trade volumes”, the WTO said.
Try to wrap your head around that. In the worst-case scenario, the WTO is worried that global trade could contract by nearly a third in 2020. That would be almost triple the decline seen during the GFC.
Fast forward to May, and the WTO is out with the latest update on their goods trade barometer, which provides real-time information on the trajectory of global commerce (although “real-time” is something of a misnomer considering this comes on a two-month delay). The latest print is for March, and it shows the gauge plunging to 87.6 from 95.5 in February. That is the lowest value ever. The gauge was launched in July of 2016.
The WTO notes that unlike February’s reading, the barometer now “captures the initial phases of the COVID-19 outbreak”. There is “no sign of the trade slump bottoming out yet”, the accompanying color reads.
“World trade was already slowing in 2019 before the COVID-19 outbreak”, the WTO reminds you on Wednesday.
That is one of the most crucial points to grasp when it comes to assessing the pandemic and its impact on the global economy. Global growth was the most sluggish since the crisis last year. Global trade contracted for the first time in a decade in 2019. And central banks were already aggressively deploying scarce ammunition in an effort to bolster the global economy.
That makes the timing of the most acute public health crisis in a century particularly bad.
The latest data from the Dutch government planning agency CPB, shows world trade contracted 1.5% in February from the previous month. The CPB publishes a World Trade Monitor every month on behalf of the European Commission. It takes two months for the figures to become available. As detailed here, CPB’s data indicates that January-February marked the first time since the longest expansion in US history began that global trade contracted 1% or more in consecutive months, on a MoM basis.
It goes without saying that recent tensions between the US and China have the potential to make this situation materially worse.
That’s one reason TD believes the risks are skewed towards the worst-case WTO scenario mentioned here at the outset.
“We have no doubt that global trade is about to fall off a cliff”, the bank’s Mitul Kotecha writes, in a note out yesterday, on the way to neatly summarizing the situation as follows:
Renewed tension between the US and China has increased the potential for further US tariffs on Chinese imports even as it looks difficult for China to live up its side of the Phase 1 trade deal. Recent talks between US and Chinese officials point to a willingness to move ahead with the Phase 1 agreement, but we think it will be increasingly difficult for China to meet its end of the bargain given the impending slowdown in trade globally and likely slow Chinese recovery. Separately, the US Congress is moving ahead with legislation against China, which could result in various other sanctions while tighter restrictions on technology sales are going into place including restrictions on technology that could be used for military use, by the end of June. All of this suggests that if anything, protectionist measures in the two biggest economies will continue to impede global trade.
And then there’s the broader, structural shifts the pandemic is set to usher in.
As noted here last week, the world has learned that stagnating middle class incomes in advanced nations aren’t the only drawback to globalization. Increasingly interdependent economies, far flung supply chains, just-in-time management and interconnected financial markets mean that when one country sneezes, the rest of the world catches cold – or, in this case, catches deadly viral pneumonia.
That is a lesson that will not soon be forgotten. Unfortunately, political opportunists with questionable motives will invariably cite this episode as a poignant example of why hyper-globalization is undesirable. Peter Navarro, for example, has already done just that.
TD reiterates the point. “The global spread of the virus has placed value chains globally at risk”, the bank says, in the same note.
“Even as factories in China open up there is a stark realization that relying on a ‘just in time’ approach to manufacturing is a major vulnerability when supply chains close up”, they add. “Even a disruption of one small part of the production chain would render the whole chain useless”.
Ultimately, TD warns that emerging markets will “need to brace for much more pain”, but that goes for the entire world, really.
Kotecha acknowledges that “never before has the reaction of authorities globally, both in G10 and EM countries, to such a shock been so aggressive and comprehensive”. That’s for sure. Indeed, we are witnessing the single largest, most coordinated rescue effort in the history of economics.
The question, as ever, is whether it will be enough.
TD’s Kotecha is dubious: “It will not prevent a major decline in growth”, he says, flatly.