A contraction in global trade in volume is likely in Q2 2022, as seen in summer 2021 and as suggested by our proxy for global demand-inventories mismatch. In our 2021 global trade report, we had estimated that 75% of the Q3 2021 contraction in global trade volume was explained by production shortfalls (supply issues), with the rest coming from logistic bottlenecks. The Chinese economic slowdown pressures global trade through the demand, supply and logistics channels. While we still expect global trade in volume to grow by +4.0% in 2022 (vs. +6.0% expected before the invasion of Ukraine), risks are clearly on the downside and depend on the sanitary situation in China.
Looking at the demand channel, a slower Chinese economy will create an exports shortfall of $140 billion for the rest of the world. This comes on top of the $480 billion exports to Russia and Eurozone lost as a result of the invasion of Ukraine. The exports shortfall could rise to $185 billion if our downside scenario materialises, and even $345 billion in the worst-case scenario. In absolute USD terms, Hong Kong, the US, Japan, South Korea and Germany would lose out the most (see Exhibit 1).
Exhibit 1: Export shortfalls by country ($ billion), depending on China economic scenario
Given China’s important position in global value chains, a sudden stop in local industrial activity would pose risks to global output, especially in the electronics and automotive sectors. Overall, it is estimated that $1.3 trillion worth of Chinese inputs are used in the rest of the world (or 1% of world excluding China output), with Japan, South Korea, Vietnam, India and Germany the most exposed. The industrial specialties in the Chinese provinces currently affected by lockdowns, along with company reports, suggest that the electronics and automotive sectors could be among the most affected. The manufacturing of semiconductors and chips do not seem to be interrupted at this stage, but firms positioned in the segment of assembly and final-good production are slowing down.
Exhibit 2: Amount of Chinese inputs used in respective economies’ output ($ billion)
Additionally, delays in global shipping are likely to remain elevated throughout 2022. Lockdowns in China are not only affecting the provinces or cities concerned, but are also creating logistical bottlenecks domestically (for example, due to stringent controls over trucks going across provinces). This means that congestion in major ports is also visible, even though they remain operational, thanks to the closed-loop system in which workers do not have contact with the general public. The volume of container vessels anchored outside Chinese ports has been above normal in March and April 2022 (see Exhibit 3), with the average monthly surplus amounting to 2.7% of annual throughput. This compares with 3.7% on average in H2 2021, when global supply-chain bottlenecks were most acute. As such, the historical relationship between Chinese port congestion and global suppliers’ delivery times suggests that the latter should remain elevated throughout 2022, but below the 2021 peaks.
Exhibit 3: Total volume of container vessels anchored outside Chinese ports (TEU)
This new shock to global supply chains could be the cause for further global inflationary pressures. Using the suppliers’ delivery time index of China’s manufacturing PMI as a proxy for domestic supply-chain bottlenecks, we find that a -1pp decline in the index (as observed in March) implies a +1.1pp increase in producer prices growth two months later. In turn, producer prices tend to lead China’s export prices by two months (with a +0.9pp sensitivity)—see Exhibit 4—and the latter tend to show a correlation with inflation in the rest of the world. Already in H2 2021, we had found that production shortfalls in China accounted for about one-third of elevated inflation in the US and the Eurozone (1.5pp to 2.0pp). The global demand context is not entirely the same this time round, but the ongoing logistics shock from China already amounts to three-quarters of that in H2 2021.
Exhibit 4: China producer prices and export prices
When it comes to global commodity prices, China is not in the driving seat but it does have the potential to drive sharp swings. Chinese growth in the 2000s was associated with what at that time was qualified as a commodity ‘super-cycle’. Last year, we underlined that we do not believe that all the necessary factors are currently at play in order to have a new super-cycle. The current tensions on commodity markets and the consequent high prices are due to strong demand and a supply-demand mismatch exacerbated by the ongoing war in Ukraine. In fact, as recently as April 2020, China was able to massively import in order to boost reserves (see Exhibit 5) at a bargain price without reviving commodity markets, which were still in oversupply and worried about the global economy (for example, Brent prices averaged about 43 USD/barrel).
Exhibit 5: Chinese monthly crude oil imports (millions of tonnes)
However, China’s role is far from being completely benign. Indeed, in recent weeks, markets have been worried about a repeat of 2020 as a major shock in China would send a shockwave to global commodity markets. In late March, as soon as the first rumours of a lockdown of Shanghai broke out and were denied by local authorities, oil markets reacted quite sharply (-2.9% on 24 March, see Exhibit 6).
Exhibit 6: Crude oil prices (Brent USD/barrel)
The city-wide lockdown announced at the end of March also led to another sharp correction (-5.4% on 31 March). Looking ahead, oil markets should brace for more volatility as the situation unfolds in China.
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.
Pablo Espinosa Uriel
Pablo Espinosa Uriel joined Allianz SE in 2020 as the capital markets analyst for emerging economies, where additionally he collaborates with the alternative investments team. Prior to this, he worked in the financial industry as a consultant, and as an economic assistant in various research institutes.