World trade in 2020: Forecast by Industry

In the analysis of the effects on world trade of the current economic crisis, triggered by the Covid-19 epidemic, it might be useful to take a look at the last major crisis faced by the world economy, the infamous Global Financial Crisis, which led to the so-called "Great Trade Collapse". In this article we will therefore compare ExportPlanning scenario for the dynamics of foreign trade in 2020-2021 with the historical dynamics of international trade flows observed over the period 2009-2010.

A tale of two crises

In 2009, foreign trade fell dramatically (-23% in dollars) and then bounced back in 2010 (+20.5%), a trend that is expected to happen again in 2020-21. However, the factors underlying the two crises are broadly different.
Ten years ago, the crisis started on financial markets. With Lehman Brothers' announcement, on September 15, 2008, of its intention to resort to Chapter 11 of the US Bankruptcy Code, the degree of opacity that characterised relations within the global financial system emerged, generating a climate of deep mutual distrust between financial players. Within days, all transactions that required a relationship of trust between banking operators became de facto impossible, including international transactions based on letters of credit. Already in Q4-2008 world trade fell by 21% QoQ, to then fall again in Q1-2009 (-20.6%), causing a chasm. In Q2-2009, world trade remained at a low level and it finally began its recovery in the summer. International trade and growing uncertainty were the fastest channel through which the crisis, originated on financial markets, reached real markets, turning the financial crisis into a demand crisis.

The 2020 crisis originates from the shock, both on the demand and supply side, caused by restrictive measures adopted by many governments worldwide, in order to contain the spread of the Covid-19 outbreak. In this case, international trade and growing uncertainty is the channel through which the effects of the shock can spread between the different countries, aggravating with negative spillovers a crisis that has already started at a national level. It is no coincidence that the World Trade Organization foresees that sectors organized in complex international value chains will suffer the sharpest effects of the crisis.
As for the intensity of the fall in trade, while in the current crisis it is likely to be proportional to the fall in activity and income levels, in 2009 its fall was more than proportional to the decrease in gross domestic product, precisely because trade was one of the channels through which the financial markets shock influenced the decline in acitivity on real markets. Uncertainty caused by the financial crisis negatively influenced the demand expressed by households and businesses, especially for durable goods linked to complex value chains, significantly reducing international trade; this was additionally exacerbated by the aforementioned problems of confidence among banking operators, that did not support foreign trade.

Further differences between the two crises concern the reaction of the dollar and commodity prices. The greenback, the safe-haven currency par excellence in times of crisis, showed an appreciation greater than 12% in terms of effective exchange rate in the 6 months between 2008 and 2009; on the other hand, in this crisis the appreciation has been lower (+8.7%) and concentrated in a narrower period, i.e. the initial phase of the crisis, roughly between the last days of February and the end of March, when panic over the spread of Covid-19 on a global scale led investors to a mass flight from emerging markets assets; at present, the dollar seems to have reached a relative stabilization.
With regard to commodity prices, excluding energy commodities, in 2008-09 their fall amounted to 33% in dollars between September 2008 and April 2009, while in the current crisis their decrease was limited, for the moment, to 4% between February and April 2020. The greatest effect shown in the first case might be due to the combined action of credit crunch and a collapse in demand, while in the current crisis the only factor at stake is the collapse on the demand side.

On the other hand, an element that the two crises have in common, and that has weighed on foreign trade in recent months (and could keep on weighing in the months to come), is the increase in protectionist measures adopted by various countries involved in the health emergency, in order to protect goods considered as essential, such as food and medical devices.

2020 vs 2009: what can data tell us?

Having outlined the characteristics of the two crises, it is possible to compare with greater awareness the relative falls (historical for 2009, expected for 2020) in terms of international trade, as can be seen from the following graph showing rates of change in world trade in 2020 and 2009, by industrial sector.

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In terms of foreign trade declines among the different industries, 2020 basically reproduces the same structure shown in 2009, with lower average decline rates. Consumer goods show the smallest decline, followed by intermediate goods, capital goods (whose trade dynamics reflect businesses expectations) and raw materials, also affected by the drop in prices.
Among consumer goods, pharmaceuticals and medical products stand out as the only sector to show a positive growth rate in terms of world trade, in 2020 (+0.9%) as in 2009 (+2%). Compared to other sectors, the expected decline in consumer packaged goods’ foreign trade is relatively modest: in the current health emergency, this sector represents one of the least penalized by the general drop in demand. The graph shows a relatively modest contraction for the sector of packaged food and beverages (-6.3% in 2020), as well, compared to a much stronger contraction in 2009, greater than 10 percentage points. In 2020, the sector of consumer goods for personal use (e.g. clothes, footwear, perfumes etc.) is expected to show a trade contraction closer to 8%, a decline that rises to -11% in the case of household goods, which mainly include durable goods. Household goods are therefore the most penalized segment among consumer goods.

Among investment goods, the automotive and agricultural equipment industry is expected to suffer the sharpest blow from the Covid-19 crisis, with an expected international trade contraction of 23.5% in 2020. The expected contraction in this sector is just a few percentage points higher than the one expected for raw materials, a sector in which the reduction in volumes is combined with falling prices. The sectors of industrial tools and equipment, ITC tools and equipment, industrial plants and electrical engineering are expected to record the smallest, albeit significant, trade fall among capital goods in 2020 (about -10%).

2021 vs 2010: the path to recovery

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The rebound forecast for 2021 shows, for almost all sectors, a percentage growth rate lower than the one recorded in 2010, which is mathematically attributable to the lower fall forecast for 2020 compared to 2009.
Higher growth rates are expected in 2021 for the sectors that have been most penalized in 2020, such as raw materials and automotive and agricultural equipment (about +15%); however, these high growth rates will not likely compensate for the strong fall recorded the previous year, shifting down the sectors’ growth trajectory.
Among consumer goods, a recovery of around 10% is expected for household goods, but still not sufficient to fully recover from the 2020 downturn. Growth is expected to exceed 9% for food products and to almost reach 8% for consumer packaged goods; these categories are expected to fully recover from the 2020 fall. Healthcare products, on the other hand, will continue on their growth path, with a clear acceleration compared to the previous year.

Conclusions

To conclude, some food for thought can be drawn from this comparison.
It has first been made clear how the two crises differ in terms of origin. Contrary to the 2009 crisis, the current one is linked to a factor external to the economic system: if removed with a resolutive therapy or a vaccine, the rebound could be faster than the one observed in 2009; on the contrary, if uncertainty were prolonged, the economic fabric could be structurally damaged, especially in the services sector, pushing many companies out of the market.
There is a general consensus that the crisis will be concentrated in the first two quarters of 2020 and that the recovery will begin in the second half of the year; most of the forecasts for international trade trends in 2020 are based on this assumption. However, this scenario does not take into account the risk of second waves of Covid-19, which are not unlikely. Estimates of the effects of the crisis on international trade are similar to those of 2009, as both crises generated uncertainty and reduced demand. Now as then, it is therefore crucial not to erect barriers to foreign trade, which could exacerbate its contraction.
A big difference from the past that is helping countries to cope with the crisis, however, is the significant and timely action of central banks, which have engaged from the outset, in many countries around the world, in expansionary monetary policy and quantitative easing programmes. At least from this point of view, we may have learnt the lesson of the last crisis, so as not to repeat the same mistakes.