A Wave of Shocks Hits the Economy
The global economy, and with that global trade is getting hit in waves.
The first shock was a supply shock that was caused by production facilities in China coming to a stop. This caused problems in supply chains that depended on parts and materials from China. Depending on the industry this shock took several weeks to hit. Industries with low inventory levels, like the automotive industry, were hit first.
The second shock was a demand shock that was caused by the anti-coronavirus measures most governments were taking around the world. As the virus spread to other countries, so did the measures. The first market to see a collapse in demand, was the Chinese market. The uncertainty of what will happen during and after this crisis has a profound impact on the global economy. Companies and consumers alike are very cautious about spending their money. Spending is down, and the uncertainty has put a lot of investments on hold. This causes the demand to go down, which causes more companies to cancel investments.
The third shock is caused by receding multilateralism. Take the trade war between China and the United States as an example. With his America First strategy, President Trump is shifting away from international collaboration and cooperation. Policies like this are not helping in a time where the world needs to work together to battle a pandemic.
Now more than ever countries are looking inside and are focused more on solving internal issues, than external cooperation.
Recession to Hit Global Trade
In their latest report, Euler Hermes writes about the impact of a quarantined world on the global economy:
We estimate that each month of confinement around the world would lead to USD538bn of export losses at the global level… Drastic confinement measures initially centred solely on China soon sent immediate shockwaves through global trade in goods and services (travel and transport) and disrupted manufacturing supply chains all over the world. As confinement measures are rolled out in Europe and the U.S., too, trade will be quarantined in 2020. Over a quarter, taking into account a progressive come-back to normal levels of activity, the losses would reach USD1064bn. Therefore, we expect a recession in trade in goods and services (Q1 and Q2 in contraction), which will bring the annual trade growth figure to -4.5% in 2020.
The MSCI World index of equities lost 30% of its value in 90 days, its sharpest correction since the 2008-09 subprime crisis. Global monetary supply signalled much tighter financial conditions. The sudden stop in the physical circulation of people, goods, services and therefore money, and the challenges it poses to the effectiveness of monetary policy (compared to social distancing), have bewildered market actors…
An unprecedented confinement shock across the world will lead to the most severe recession of the century. Accruing effects matter. COVID-19 has become a seclusion crisis, i.e. the realization by governments of the necessity of imposing drastic confinement measures, implying significant sacrifices in terms of growth, as private consumption and investment is put on hold. As of the time of writing, more than 50% of global GDP (and population) is in a lockdown of some sort, thereby creating second- and third-round effects on investment-savings loops and behaviors as the shock has been exponential, probabilistic, and collective.
How Deep Will The Recession Be?
Euler Hermes has worked out several scenarios of how the world economy could respond. Their baselines scenario predicts a severe recession in 2020 and a U-shaped recovery in 2021. It is based on a gradual return to normal activity by the end of June. For every month of lockdown the drop in real GDP can be as high as 10%.
There are also some upcoming events that can cause even more uncertainty. The elections in the United States for example, and Brexit.
While large bankruptcies can be avoided if governments intervene, there will still be a lot of companies going out of business. For the second half of the year, the increase in bankruptcies could rise by 7% in the United States, 16% in Europe, and 15% in China.
What Are the Long-term Consequences?
There will be positive and negative long-term consequences of this crisis.
- The pandemic is focussing the world’s attention to healthcare, and this can lead to increased investments in an area where underinvestment was the norm.
- China’s influence in the world could grow. They were the first to be hit by the virus, but are now also the first to recover. China is now helping out by sending both supplies and expertise to the United States and Europe.
- Globalization will decrease, with countries like the United States putting a bigger focus on themselves while trying to lessen the dependability on countries like China. Supply chains will be shorter.
- Now that we have seen how fast the world can respond to a crisis, this may also be applied to the issue of climate change.
- After this crisis people, and companies may have become much more careful about how they spend their money, resulting in more defensive investment strategies.
Customs and Corona
The coronavirus crisis has a profound impact on Global Trade, but that doesn't mean the flow of goods is coming to a complete stop. Whether it is fruits and vegetables, healthcare supplies, parts, or other goods, still a lot of shipments are being processed by Customs Authorities across Europe. The same goes for our customs agents and specialists. Whether it is from home, or on location if needed, our people are making sure our customers’ imports and exports run smoothly.
We are noticing that some processes run slightly less smooth, now that Customs Authorities have scaled back and are adapting to the new situation. However, we above all see that everybody is working hard to make the best out of it. So on a closing note, we would like to show our appreciation to everybody that is making sure that goods keep flowing.
Thank you!
For a more detailed analysis and alternative scenarios, please see the original Euler Hermes article here.
