Dr. Rajkumar Singh 25 April 2020
Increasingly stringent containment measures, needed to slow the spread of the Coronavirus (Covid-19), will lead to significant short-term declines in GDP for many major economies. As per a latest estimates the lockdown will directly affect sectors amounting to up to one third of GDP in the major economies and for each month of containment, there will be a loss of 2 percentage points in annual GDP growth. This is unavoidable, as we need to continue fighting the pandemic, while at the same time increasing efforts to be able to restore economic normality as fast as possible. The high costs that public health measures are imposing today are necessary to avoid much more tragic consequences and even worse impacts on our economies. World trade is expected to fall by between 13% and 32% in 2020 as the COVID 19 pandemic disrupts normal economic activity and life around the world. World merchandise trade is set to plummet by between 13 and 32% in 2020 due to the COVID-19 pandemic. A 2021 recovery in trade is expected, but dependent on the duration of the outbreak and the effectiveness of the policy responses. Nearly all regions will suffer double-digit declines in trade volumes in 2020, with exports from North America and Asia hit hardest. Trade will likely fall steeper in sectors with complex value chains, particularly electronics and automotive products. Services trade may be most directly affected by COVID-19 through transport and travel restrictions. The unavoidable declines in trade and output will have painful consequences for households and businesses, on top of the human suffering caused by the disease itself.
Variations in trade impacts
In all economies, the majority of this impact comes from the hit to output in retail and wholesale trade, and in professional and real estate services. There are notable cross-country differences in some sectors, with closures of transport manufacturing relatively important in some countries, while the decline in tourist and leisure activities is relatively important in others. The impact effect of business closures could result in reductions of 15% or more in the level of output throughout the advanced economies and major emerging-market economies. In the median economy, output would decline by 25%. Variations in the impact effect across economies reflect differences in the composition of output. Many countries in which tourism is relatively important could potentially be affected more severely by shutdowns and limitations on travel. At the other extreme, countries with relatively sizeable agricultural and mining sectors, including oil production, may experience smaller initial effects from containment measures, although output will be subsequently hit by reduced global commodity demand. There will also be some variation in the timing of the initial impact on output across economies, reflecting differences in the timing and degree of containment measures. Trade was already slowing in 2019 before the virus struck, weighed down by trade tensions and slowing economic growth. World merchandise trade registered a slight decline for the year of ‑0.1% in volume terms after rising by 2.9% in the previous year. In contrast, world commercial services trade increased in 2019, with exports in dollar terms rising by 2% to US$ 6.03 trillion. The pace of expansion was slower than in 2018, when services trade increased by 9%. But a rapid, vigorous rebound is possible. Decisions taken now will determine the future shape of the recovery and global growth prospects. We need to lay the foundations for a strong, sustained and socially inclusive recovery. Trade will be an important ingredient here, along with fiscal and monetary policy. Keeping markets open and predictable, as well as fostering a more generally favourable business environment, will be critical to spur the renewed investment we will need. And if countries work together, we will see a much faster recovery than if each country acts alone. However, the immediate goal is to bring the pandemic under control and mitigate the economic damage to people, companies and countries.
Possible outlook for trade in 2020-2021
The economic shock of the COVID-19 pandemic inevitably invites comparisons to the global financial crisis of 2008-09. These crises are similar in certain respects but very different in others. As in 2008-09, governments have again intervened with monetary and fiscal policy to counter the downturn and provide temporary income support to businesses and households. But restrictions on movement and social distancing to slow the spread of the disease mean that labour supply, transport and travel are today directly affected in ways they were not during the financial crisis. Whole sectors of national economies have been shut down, including hotels, restaurants, non-essential retail trade, tourism and significant shares of manufacturing. Under these circumstances, forecasting requires strong assumptions about the progress of the disease and a greater reliance on estimated data.
Under the optimistic scenario, the recovery will be strong enough to bring trade close to its pre-pandemic trend while the pessimistic scenario only envisages a partial recovery. Given the level of uncertainties, it is worth emphasizing that the initial trajectory does not necessarily determine the subsequent recovery. One could see a sharp decline in 2020 trade volumes along the lines of the pessimistic scenario, but an equally dramatic rebound, bringing trade much closer to the line of the optimistic scenario by 2021 or 2022. A strong rebound is more likely if businesses and consumers view the pandemic as a temporary, one-time shock. In this case, spending on investment goods and consumer durables could resume at close to previous levels once the crisis abates. On the other hand, if the outbreak is prolonged and/or recurring uncertainty becomes pervasive, households and business are likely to spend more cautiously.
Other dominating factors
If the pandemic is brought under control and trade starts to expand again, most regions could record double-digit rebounds in 2021 of around 21% in the optimistic scenario and 24% in the pessimistic scenario. The extent of uncertainty is very high, and it is well within the realm of possibilities that for both 2020 and 2021 the outcomes could be above or below. Two other aspects that distinguish the current downturn from the financial crisis are the role of value chains and trade in services. Value chain disruption was already an issue when COVID‑19 was mostly confined to China. It remains a salient factor now that the disease has become more widespread. Trade is likely to fall more steeply in sectors characterized by complex value chain linkages, particularly in electronics and automotive products. According to an estimate the share of foreign value added in electronics exports was around 10% for the United States, 25% for China, more than 30% for Korea, greater than 40% for Singapore and more than 50% for Mexico, Malaysia and Vietnam. Imports of key production inputs are likely to be interrupted by social distancing, which caused factories to temporarily close in China and which is now happening in Europe and North America. The impact of the COVID-19 outbreak on international trade is not yet visible in most trade data but some timely and leading indicators may already yield clues about the extent of the slowdown and how it compares to earlier crises.