COVID-19 Creates Shifts in Global Trade Dynamics
The European Central Bank (ECB) just announced today that the Euro area GDP is likely to shrink between 8%-12% in 2020. While this is a staggering contraction for one of the largest economic regions in the world, the implications are even more dramatic for global trade dynamics.
The coronavirus pandemic continues to pose challenges which many would not have imagined only a few months ago. Due to the quick nature of the outbreak, economies had a difficult time adapting and drastic decisions led to economic lockdowns in most parts of the world.
Global Trade Shrinks at an Unprecedented Pace
Globalization was the theme for the last few decades. Every study in business school over the past 20 years concluded that international corporations should head to China for further expansion of their businesses. China and other emerging markets became the de facto global manufacturer – but a growing middle class there also attracted many Western firms.
Logistic firms play a crucial role in connecting Asia with the rest of the world, and the shipping industry grew at impressive rates. Therefore, investors wanting to assess the impact of the coronavirus pandemic on global trade, start by focusing on the logistics sector.
Plummeting shares of logistics companies confirmed that the global trade of goods contracted to over 3%. Which is the largest contraction since the 2008-2009, and the question now is – how long will it last?
According to Deutsche Bank’s GDP forecast, the trend will likely continue for the rest of the year. The annual global goods trade will shrink by 13.6% in 2020, and only recover 7.5% in 2021. What it tells investors is that the global trade dynamics change dramatically for the period ahead, with countries shifting some production back to their homeland. Outsourcing to Asia will see a shift as well.
Deutsche Bank makes an interesting parallel between the German GDP and global trade. They evolved in a correlated manner so far, with the German GDP being used as a benchmark for global trade (the German economy is an export-oriented one).
As a consequence of the German GDP is forecasted to shrink by 16% in the Q2 of 2020, the global trade will decline on an annual basis by 20% in 2020 and remains flat in 2021.
Compared to the IMF’a April 2020 economic outlook, Deutsche Bank’s model forecasts a heavier contraction (-20% when compared with -11% as per the IMF model).
In both cases, these are numbers that far exceed the 2008-2009 Global Financial Crisis impact. To recover from this drop, the world needs to redesign the way it conducts global trade.