Doha: Few indicators express the overall health of the world economy as well as trade data. Supported by real cross-border transactions, trade data captures the demand for key products and factors of production, such as physical consumer goods, capital goods, basic inputs and raw materials.
Therefore, global trade data tends to be highly sensitive to macroeconomic conditions, moving with cycles of economic expansion and contraction.
Recently, after the sharp but short-lived collapse in activity following the outbreak of the Covid-19 pandemic, global trade has rebounded strongly.
In fact, according to the Netherlands Central Planning Bureau for Economic Policy Analysis (CPB NEPA), global trade volumes have jumped 30% since the depths of the Great Pandemic Recession, far exceeding levels pre-pandemic and comfortably reaching all-time highs. Surprisingly, this happened even as severe pandemic-driven bottlenecks and supply chain constraints persisted in some key segments, such as chip production and port congestion due to recent lockdowns in China.
However, global trade volume data tends to give us a picture of the recent past rather than the present or the coming future. CPB NEPA data, for example, is released with a three-month lag, which means its recent printout reflects trading volumes from February 2022. That’s why we prefer to look at other points of view. data that tends to predict trade volume data, rather than looking at it upside down.
In our view, leading indicators suggest that global trade will slow sharply in the coming months. Three main points underlie our analysis.
First, high-frequency data from major key economies (the United States, European Union and Japan) are already pointing to weakening global trade growth. Flash surveys of the Purchasing Managers’ Index (PMI) have recorded consecutive months of slowing new export orders from advanced economies, showing contraction momentum for the first time since December 2020, when the recovery after the pandemic shock has grown. This corresponds to a significant deceleration in trade growth among top reporting Asian exporters (South Korea, Taiwan, Singapore and Japan), which tend to lead global trade patterns, given the key role they play in the supply chain. supply chain for large multinationals. . Such moves indicate a sharp slowdown in overall world trade.
Second, investor expectations for future earnings from the transportation sector, a key indicator of future growth in global trade, had also begun to point to weak demand for physical goods. The Dow Jones Transportation Average, a stock market index comprised of airlines, trucking, shipping, rail and delivery, whose performance outpaces global exports by about 3 months, peaked in March of the year last, dropping considerably since then. The index signals not only a significant deceleration in growth, but also a contraction in world trade over the coming months.
Third, structural factors also point to a more persistent weakening in demand for consumer goods. Trade growth during the global recovery has been driven by exceptional demand for physical goods during the pandemic. This was caused by stimulus measures and a temporary shift in spending patterns away from services, as social distancing measures limited face-to-face business and the service economy.
Additionally, after most major economies “reopened” as the effect of the pandemic waned, trade was also supported by the need to replenish low inventories. But all of these factors are already starting to reverse, in a move that will likely accelerate in the second half of this year.
A strong economic recovery and successful mass vaccination campaigns led to a withdrawal of stimulus measures and a rebalancing of spending habits towards services. Demand for physical goods, such as electronics and home building equipment, has been “pulled forward” or anticipated in time during the pandemic, meaning there will likely be a long period of lower demand for these goods in the near future. Inventory levels are also rapidly normalizing across the board. With lower spending on consumer goods, capital goods and an accumulation of inventories, the current deceleration in global trade is expected to accelerate.
Overall, global trade volumes have already peaked for this cycle and are expected to deteriorate significantly in the short to medium term.
This is a further indication of the difficult macroeconomic environment ahead, as the global growth outlook darkens.