economic-outlook

How does global trade absorb the blows from the coronavirus and Ukraine?

First the coronavirus; now the military conflict in Ukraine. What is the impact on global trade? Our research department has published a report on this. The consequences of the renewed lockdowns in China are also included. In this article, we list the most significant consequences.

Firstly, we focus on the effect of the Russian invasion on global economic growth. We lowered the growth forecast for 2022 to +3.3% and for 2023 to +2.8%. Russia itself has suffered the severest impact. The country is entering a deep recession this year due to a decline of at least -8%.

Nearly two-thirds of our downward revision of global growth projections is owing to diminishing confidence and supply chain problems. The remaining growth loss is the result of higher input prices. Not only is global inflation increasing faster than previously thought, but higher inflation will also be more persistent. For 2022, we assume 6% inflation — almost 2% higher than previous estimates.

Should the conflict escalate further, this will lead to even stricter sanctions and counter-sanctions (including the energy supply). In such an unfavourable scenario, inflation will rise to 7.0%, while economic growth will fall to 2.5%. As a result, the global economy will enter a recession in 2023.

We expect global trade growth to decline from +6% to +4% in 2022. Although Russia's role in global trade is limited, exporters in Central and Eastern Europe, in particular, could suffer substantial losses. Important Russian export products are fertilisers, metals (e.g. iron, steel, aluminium, copper, nickel and tin) and foodstuffs (e.g. wheat). Automotive production, especially in Europe, is being impacted by shortages of metals and gases essential for the manufacture of semiconductors and other components.

Global trade is also struggling with the ongoing health restrictions in China in response to fresh COVID-19 outbreaks. Take the Port of Shanghai, the largest commercial port in the world. Long rows of container ships are waiting to be put to use. It's the same story at various other Chinese ports. This is part of the reason that problems persist within supply chains.

The trade sanctions against Russia have created extreme price volatility in oil and gas, wheat, and certain metals and industrial gases because of supply shortages. Natural gas prices in Europe are likely to remain high due to the heavy reliance on Russian gas. However, we expect the oil price to gradually decrease again in the coming months. Supply and demand will normalise.

Inflation continues to rise. This is partly why both the US and European central banks (FED and ECB) decided to scale back the bond-buying programme. The FED has announced five rate hikes for this year and four for next year. The European bank may also follow with interest rate hikes next year.
If we look at global trade (goods and services), we see lower volumes and higher prices for 2022. In line with the decline in economic growth, we also see a decrease of two percentage points in the volume of global trade (+4.0% instead of +6%). The growth in the value of global trade reveals a different picture: as a result of the price rises, it is increasing more than previously expected. Rather than +7.2%, the growth is 10.9%.
The war will result in a loss of 480 billion dollars in exports. Not only exports to Russia, but also to the Eurozone. A complete shutdown of trade ties will cost the four largest economies of the Eurozone up to 0.4% of their GDP and 1.1% of their exports. Businesses in Eastern Europe are most vulnerable in this situation. This applies especially to Moldova, Slovakia, Serbia, Slovenia and the Czech Republic, where exports amount to more than 1.5% of GDP.
Trading costs are being driven up by rising oil prices. We are also seeing an increase in the costs of container transport as a result. Brent crude and container freight prices have shown a correlation of 90% since 2020. This would mean we are heading for a record high of USD 14,000/FEU for freight rates.
The key products from Russia are energy (oil and gas; 9% of worldwide exports), metals (including aluminium, palladium and nickel; 3% of worldwide exports) and agri-food products (including wheat and maize; 2% of global exports). Countries most vulnerable in relation to these products: Bulgaria, Lithuania and Hungary. Some Western and Northern European countries are also among the 20 most vulnerable countries, including the Netherlands, Sweden, Italy and Germany.
Because of rising inflation and the interest rate hikes announced in the US, financing costs are rising. For this year, we expect five more rate hikes in the US in 2022 (and four in 2023). As a result, the dollar will continue to appreciate in value. Research shows that a more expensive dollar (as the main billing currency for global trade) comes at the expense of trading volume. With an appreciation of 1% of the dollar, the total trading volume worldwide decreases by -0.6 to -0.8%.

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