World trade declined 1.5% m/m in February; sharper declines to come

*The Netherlands Bureau for Economic Policy Analysis (CPB) estimates that the volume of world trade declined by 1.5% m/m in February, lowering its yr/yr change to -2.6% from -2.3% (Chart 1). This is just the beginning of the sharp declines to come. We expect the volume of global trade to decline by at least 20%, similar to its peak-to-trough decline during the 2008-2009 global recession.

*The CPB estimates that world industrial production declined by 0.1% m/m in February after its large 2.8% m/m decline in January, already pushing it 3.1% below its recent peak (Chart 2). Further sizable declines are expected: world IP is expected to drop more than its 14% decline in 2008-2009.

*Sharp declines in South Korea’s exports (-26.9% yr/yr) and imports (-18.6% yr/yr) during the first 20 days of April portends much sharper declines in global trade in subsequent reports. Similarly, dramatic declines in U.S. IP (-5.5% yr/yr) and durable goods shipments (-6.5% yr/yr) in March point to steeper declines in global IP (Table 1).

Preliminary estimates of April manufacturing PMIs for the UK, Euro area, Germany, and the U.S. all declined to the 30s in April, reflecting the shutdown of non-essential business activities and sharp drop in demand (April European PMIs: this is probably the worst of it, Florian Hense, April 23, 2020). Japan’s manufacturing PMI remained in the 40s in April, but the survey may not have captured the intensity of its recent shutdown that only began in the last couple of weeks (Chart 3).

Global industrial production will remain subdued after the worst of this crisis ends. We expect businesses to remain cautious, placing a higher priority on efficient operations and restoring damage to their cash flows and balance sheets than capital-intensive investments. Moreover, sharp declines in investment in the oil and drilling sector in the U.S. and other oil producing countries will weigh heavily on overall capital spending. Production processes will be hampered in some industries by supply chain bottlenecks and different speeds of normalization internationally.

The COVID-19 pandemic will exacerbate the factors that have contributed to the flattening of growth in global trade relative to global output over the last decade. Moreover, two industrial sectors that contribute heavily to global trade, automobiles and air travel, seem likely to face slow recoveries (The decade-long deceleration of global trade: sources and implications, January 13, 2020).

Spot commodity price indexes for raw industrials and metals have yet to trough, reflecting expectations for continued steep declines in global industrial production in the intermediate term (Chart 4). Note that these commodity price indexes bottomed out in late 2015, well before the rebound in global industrial production in Fall 2016, and peaked in mid-2018, before the sharp slowdown in global IP growth began in late 2018.

The declines in global trade and production are rapid and steep, but the rebounds will be slow and choppy in its early stages.

Chart 1:

Chart 2:

Chart 3:

Chart 4:

Table 1: Trade and Production for Key Economies

Sources: China Customs, Japan Ministry of Finance, Japan Tariff Association, Japan Ministry of Economy, Trade & Industry, Korea

Customs Service, Statistics Korea, Deutsche Bundesbank, Eurostat, Census Bureau, Federal Reserve Board, Banco Central do Brasil,

Instituto Brasileiro de Geografia e Estatistica, and Berenberg Capital Markets

Mickey Levy, mickey.levy@berenberg-us.com

Roiana Reid, roiana.reid@berenberg-us.com

Member FINRA & SIPC
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