Advanced indicators confirm our forecast for a global trade recession in the second quarter (Q2) of 2022, partly driven by China’s lockdowns. Global trade in volume terms contracted in Q3 2021 and after the start of the war in Ukraine, we pointed out that the risk of double-dip in global trade in H1 2022 had increased—not only due to supply-chain bottlenecks, but also because of lower demand. The omicron crisis in China led us to confirm this expectation. These consecutive shocks to the global economy have led to an acute mismatch in the global balances of demand and manufacturers’ inventories (see Exhibit 1). We now expect global trade of goods in volume terms to contract by -1.3% q/q in Q2 2022, followed by a mild recovery in the rest of the year (+1.1% q/q in Q3 and +0.8% in Q4).
Overall, global trade is set to grow by +3.5% in 2022 in volume terms, down from our previous forecast of +4%. Indeed, this new number takes into account the full extent of China’s omicron crisis, which is now largely past but lasted longer than previously expected. The slower Chinese economy is creating an exports shortfall for the rest of the world that is estimated at $160 billion. This is in addition to the shortfalls triggered by the direct and indirect effects from the war in Ukraine ($480 billion). In total, close to 2% of global trade is at risk of being lost in 2022. As a result, risks remained skewed on the downside. In value terms, global trade is set to grow by +10.4% in 2022 as the price effect from supply-chain bottlenecks and transportation congestions remains high.
Exhibit 1: Global trade of goods in volume terms (%y/y) and proxy for global demand—stocks
Several critical intermediate goods are produced, transited and shipped out of China and Asia (such as semiconductors) but slower industrial activity and congestion in domestic logistics have slowed down exports in the past few months. Looking at the manufacturing sector in Taiwan as a proxy, given its strong exposure to the electronics sector, we see that a production shortfall there clearly contributes to shortages of inputs in the US and the Eurozone (see Exhibit 2). The imbalance had been easing since the start of the year but remains at a high level, and the index for the production shortfall in Taiwan shot up again in May 2022. As a result, barring a sharp drop in demand, shortages will likely remain in the short-term.
Exhibit 2: Input shortages in the US and the Eurozone (rhs) vs production shortfall in Taiwan
In addition, global and Chinese port congestion have worsened again and are back to the worst levels of 2021. The volume of container vessels anchored outside ports across the world has averaged 5.9% of annual throughput per month since March, versus a monthly average of 5.5% in the second half of 2021. The same calculations for China show a congestion level that also already exceeded the worst of 2021. As a result, long delays and elevated costs of shipping are also likely to persist in the short term.
China stringency normalising should provide a (mild) reopening boost to global trade
China continues to maintain its zero-COVID policy, but the worst of the latest outbreak is likely behind us. We estimate that Chinese provinces that were under partial or full lockdowns summed up to nearly 25% of national GDP in March-April. The share has since come down to 9% in May and 5% in the first half of June. Our proxy for national traffic congestion (see Exhibit 3) was down by -6.8% y/y on average in March and -7.6% in April. It has since improved to -2.4% y/y in May. In this context, a return-to-normal at the national level in July is possible, barring renewed large-scale COVID-19 infections and lockdowns, and based on the post-lockdown experiences observed in 2020.*
Exhibit 3: Traffic congestion index (population-weighted average of 100 cities), 100 = 30 days before Chinese New Year
Manufacturers in the rest of the world dependent on Chinese goods could see a boost from the end of summer onwards. The normalisation of mobility in China means that industrial activity there should also recover, in particular in the automotive, electronics, computers and telecom, household equipment and machinery and equipment sectors. Once production comes back to normal, however, the impact on other countries that rely on Chinese goods also depends on China’s port activity.
Based on the temporary port closures seen in 2021, it could take between two to three months for port congestion to normalise. This would imply a surge in goods trade around August or September, which are traditionally critical months as many sectors are preparing production and piling up inventories ahead of the festive season. In other words, China’s reopening could come right on time to save Christmas.
* Indeed, some cities that have gone through partial or full lockdowns this year are already seeing normalised mobility, while others (including Shanghai) could wait until mid-June if we apply the average period of 50 days from-trough-to-normal for mobility observed in cities that underwent full lockdowns in 2020.
Françoise joined Allianz Trade in 2019 as a senior economist for Asia-Pacific. Prior to this, Françoise worked as an Economist for over five years at the equity broker Exane BNP Paribas in London. There, she was in charge of the macroeconomic analysis of the Chinese economy and Emerging Markets. She also worked on global and European topical themes. Her other work experiences include the ACPR, the French supervisor for the banking and insurance sectors.
Ano Kuhanathan has held various positions in the financial industry in trading, research and consulting. He was the Eurozone economist at Axa Investment Managers from 2016 to 2018. Before joining Allianz Trade in 2020, he was the head of economic advisory and advanced analytics at EY Advisory. Ano regularly teaches economics, sustainable finance and applied data science at Neoma Business School.