COVID-19 De-globalisation Shock

COVID-19 supply chain disruptions will abruptly end the nascent recovery in global trade. The demand shock from quarantines and other preventative measures will amplify this as imports compress. Last year’s annual decline in trade volumes will likely be repeated and a third consecutive year of slowing global GDP growth appears unavoidable. Gradual yet potentially prolonged de-globalisation is real. Asia has so far borne the brunt of the trade decline, but we expect its effects soon to become evident in Europe also.

Global Trade Contracted For the First Time in a Decade Last Year

Global trade volumes shrunk 0.4% in 2019 (goods basis). This marks the first annual decline in trade volumes since the 12.8% collapse in 2009 and is indicative of the steady deceleration in trade growth throughout the US-China trade war. Emerging market trade growth fared worse than that of advanced economies, with both imports and exports contracting while advanced economy trade was flat. The weakness in EM trade raises doubts over the extent of rotation in trade patterns (i.e. China importing soybeans from Brazil rather than the US, and trade rotating out of China to Vietnam and elsewhere in Asia). And with total trade volumes shrinking, the de-globalisation trend was already underway well ahead of the COVID-19 outbreak.

Chart 1: De-globalisation Was Already Underway

Source: CPB World Trade Monitor, Macro Hive

COVID-19 Will Hit Trade on Both the Demand and Supply Side

With COVID-19 both a demand- and a supply-side shock, its impact on global trade will be amplified. The  quarantines and other preventative measures will reduce consumption and imports and exacerbate the impact of the purely supply-side disruptions. Indeed, last year’s import weakness in EM was partly due to weakness in domestic demand. Asia fared particularly badly given the US-China trade war and the resulting growth slowdown across the region. Latin America also saw declining trade volumes reflecting lacklustre growth in Brazil and Mexico and ongoing stress in Argentina. This will likely get much worse, but no longer will it be contained to EM this year. COVID-19 could easily sap consumption and import demand globally, at least temporarily. For Germany, where consumption has been the main support to growth, avoiding recession and trade contraction will be difficult should COVID-19 take hold more widely. In Italy, where weak domestic demand and import contraction was already underway last year, the huge disruptions currently in place due to COVID-19 will accelerate this trend.

Chart 2: Both EM and DM Set For Further Weakness This Year

Source: CPB World Trade Monitor, Macro Hive

Renewed Warnings Over Global Recession

Projections for global growth are rapidly being revised lower, and the risk of global recession has materially increased. The OECD this week cut it’s 2020 GDP growth forecast to 2.4% but said it could be as low as 1.4% if coronavirus spreads more widely. The IMF defines global recession as a contraction in per capita real GDP alongside weakness in a range of activity indicators. With global population growth around 1%, it is feasible that the global economy could near recession this year. And even if a technical global recession is avoided, with an increasingly large number of economies seeing sharp growth slowdowns, it could well feel like one.

Chart 3: Global GDP Growth Set to Slow Sharply This Year

Source: IMF, OECD, Macro Hive, (trade here is goods and services)

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)