The current business cycle is atypical and this influences the analytical approach, with a focus on the supply side and whether it will be able to meet the level of demand in the economy, rather than on the demand side. Supply side disruption has been a key issue but recent PMI data suggest that we may have seen the worst. In the euro area and the US, the percentage of companies that are confronted with rising input prices and are contemplating to increase their output prices has started to decline and delivery lags are shortening. The Federal Reserve of New York’s global supply chain pressures index seems to have peaked. However, anecdotal evidence suggests visibility remains very low
The Covid-19 pandemic has laid bare weaknesses and vulnerabilities in global supply chains. It has increased calls for making global value chains (GVCs) more robust and resilient, and reducing the dependence on East and Southeast Asia. Enterprises are in the process of improving the resilience of their supply chains by improving the transparency of their value chains, and building more redundancy in supplier networks, and transportation and logistics systems. At the macro-level, both the United States and the European Union have been updating their industrial strategies to increase their autonomy in strategic sectors. However, we should not forget that GVCs in itself is not the problem
The Covid-19 crisis is still generating lively discussions on the future of globalisation of trade and finances, and global value chains. The share of foreign value added embedded in the exports of a country or region[1] is a good indicator of the level of involvement in global value chains. This share increased rapidly from the early 1990s until the global financial crisis of 2008, under the effect of trade liberalisation (cuts in tariffs and proliferation of free trade agreements) and falling transport costs. This increase was particularly significant in Asia, the emergence of China as the factory of the world leading to the imports of more intermediary goods mainly from Europe and North America
World trade tensions and supply chain frictions will continue to be major sources of uncertainty in 2022, given their impact on imports prices, and in turn, consumer prices. Based on simulations, UNCTAD estimates that an increase in maritime freight costs would drive up global import prices by 10.6% by the end of 2023, with a smaller but non-negligible impact on global consumer prices of 1.5%. There is also a risk that shortages of certain key components, notably semiconductors, persist for several more months.
Although tensions in world trade remain fierce, there were some signs of easing in October. The Baltic Dry Index (BDI), which reflects the cost of maritime transport for dry bulk goods, declined by around 30% after peaking in the first week of October. Nonetheless, the rise in costs since the start of the year remains impressive, nearly a tripling. Looking more closely at October’s figures, we can see that the decline in the BDI was limited solely to very high tonnage container ships, while freight prices continued to rise for smaller vessels.
Most indicators confirm that world demand for industrial goods is still going strong, suggesting an accentuation or at least the continuation of the supply-chain problems currently facing many companies. Production pressures are compounded by transport pressures, which were showing no signs of easing in early fall.
The number of deaths also declined for the third consecutive week, down 3% compared to the previous week. In terms of retail and leisure activity, footfall has returned to pre-pandemic levels in Germany, Belgium, France and Italy, while it is still below pre-Covid levels in Spain, the United States, Japan and the UK.
Although the momentum remains strong, world trade volumes could begin to taper off this summer, judging by the results of recent opinion surveys. The global PMI index declined 2 points to 56.6 in June, pulled down by the drop in the manufacturing “new export orders” component.
The number of new Covid-19 cases continues to rise worldwide. The surge is due to the Delta variant, which is much more contagious than the other variants. It has now spread to more than 110 countries. The number of daily cases passed the half million mark on July 13 and 14.
World trade in goods has rebounded very strongly, even though major divergences exist between regions due mainly to widely contrasting health and economic situations. The turnaround in services exports has been much slower, with transport and tourism still holding at very low levels. Trade in information and communication technology (ICT) services was much more resilient in 2020. Brexit triggered a sharp increase in the number of new trade agreements in 2021. Two major trade agreements negotiated by the European Union are still pending, one with Mercosur and the other with China. Negotiations between the United States and China are also at a standstill after the failure of bilateral talks held in Alaska in mid-March.
World merchandise trade has recovered much quicker from the steep fall at the outbreak of the Covid-19 pandemic than anticipated. In March and April 2020, at the height of the crisis, trade was almost 20% lower than a year earlier. Despite the continuation of the lockdown restrictions and distancing rules in large parts of the industrial world, world trade has continued to expand. In November 2020 (latest data available), merchandise trade was back at the level at the end of 2019. After the financial crisis in 2008, it took more than two years for trade in goods to return to the pre-crisis level. The reason for the quick recovery in goods trade is due to the special nature of the shock, which affected in particular services such as retail trade and the catering industry
The United Kingdom has since 1 January fully exited the European Union, and a free-trade agreement has been found, as has been customary with Brexit, at the last minute. While that is good news for the British and European economies, Brexit is still “hard” and will surely trigger substantial economic losses in the long term.
Although the United Kingdom officially left the European Union on 31 January 2020, trade relations between the two trading blocs remain intact during a transition period. Barring a spectacular turn of events, this period will end on 31 December. Whatever happens, the UK is heading towards an exit from both the EU’s single market and customs union. This means that it will be a “hard” Brexit. And it could be the hardest possible if the two parties failed to agree on a free trade agreement. In fact, UK and EU negotiators have just completed their ninth round of talks – the last initially planned – but there are still major divergences
The Central European countries are exposed to the impact of the Covid-19 pandemic on trade flows, through their integration in multi-country supply chains. In the short term, it creates spillover effects from the contraction in economic activity observed in Western Europe, particularly in Slovakia and the Czech Republic, via the automotive sector. Although the Central European countries moved up the value chain in the automotive industry, the proportion of a vehicle built locally has not widely increased in recent years
The US-China trade deal has brought relief. It avoids new tariff increases by the US with the risk of further escalation. The deal should be welcomed in China, given its ongoing growth slowdown, but also in the US where companies had increasingly expressed their concern about the trade confrontation The rest of the world will monitor closely the extent of trade diversion which could follow from the agreement. Attention will now shift to the phase 2 negotiations, which could very well mean that trade uncertainty will intensify at some stage.
