Does global trade finally have wind in its sails?

After an underwhelming 2023, things are finally looking up for global imports and exports - but the longer-term outlook is uncertain

 

Atradius is one of many forecasters now predicting a soft landing for the global economy, with inflation coming down across the board and recession looking increasingly unlikely. GDP predictions have been revised upwards for 2024, and 2025 is looking a little better still.

 

One of the factors driving this cautiously optimistic scenario - and being driven by it - is improved global trade. Trade shrank by 1.2% in a disappointing 2023, so we’re starting from a low base. Nevertheless, our forecast of 2.5% growth in 2024 followed by 3% in 2025 is evidence of a small but encouraging rebound. Despite persistent economic challenges and continuing geopolitical tensions, the wings of global trade are beginning to catch the breeze.

 

Nobody is getting carried away. Even with these figures, global trade growth remains low by historical standards. But it is moving in the right direction and there is a sense of growing momentum.

 

What can we put this rebound down to and how confident are we in our predictions? Let’s take a look at the details.

 

Europe drags down global performance in 2023

 

The background to our forecast is the unexpectedly poor performance of global trade in 2023. In December, we halved our forecast for the year to 0.8% growth, in line with the general trend. As it turns out, even this downbeat prediction was optimistic. Trade shrank by 1.2% last year, for reasons that have now become apparent.

• Of the major economies, only China recorded global trade growth (of 5%) in 2023. Cross-border trade activity was subdued in the US, while in the eurozone it shrank by 4%. The eurozone is responsible for 30% of the weight in global trade, so this region was the main drag on growth in 2023.
• Why was Europe affected so badly? Mostly, it was down to energy price inflation associated with Russia’s invasion of Ukraine. Spiraling gas prices drove up manufacturing costs, making European goods uncompetitive. This was compounded by weak demand from China, while domestic demand in the eurozone was impacted by low GDP growth.
• Predictably, this created stagnation in the manufacturing sector which consequently found investment difficult to come by. With interest rates high, bank lending was out of reach for many businesses. A lack of access to finance delayed efforts to modernise or streamline processes, and in some cases led to business failure.
• A difficult lending environment also reduced demand for goods - and particularly those that are typically bought on credit like cars and appliances. Consumer caution was very much in evidence in Europe, with household disposable income under serious pressure from the higher cost-of-living. Wage growth was insufficient in 2023.
• These factors were also present in other economies, but not to the same extent. In the US, for example, which had a far lower exposure to Russian gas, energy price inflation was considerably lower and consumers continued to spend their accumulated pandemic-related savings.

Key indicators turn from red to green

 

With all these factors at play, 2023 was undeniably a tough one for manufacturers and logistics companies, especially in Europe. Every important indicator pointed in the wrong direction. But we don‘t expect that to continue, for a number of reasons.

 

Eurozone GDP growth is picking up and becoming less service driven. As Europe weans itself off Russian gas, the manufacturing recovery is being aided by lower energy costs, even if they remain high by historical standards. Chinese demand is also recovering.

 

"In such an environment, investment will inevitably pick up. In addition, disposable income for consumers is benefitting from the benign coincidence of lower inflation and wage growth that is still catching up. Moreover, as monetary easing comes in, credit will become less expensive. This all points to more spending on durables, and with it increased trade." (John Lorié, Chief Economist, Atradius)

 

That’s why we’re reasonably bullish in our forecasts for trade in 2024 and 2025. Europe dragged global trade totals down last year but many of the reasons for its poor performance are gradually evaporating. As trading conditions improve in the eurozone, they will simultaneously pick up around the world as well.

 

Global fragmentation shackles potential

 

So key indicators have reversed, and now point to a slow improvement in global trade. But it is important to emphasise the ‘slow’. Inflation is coming down almost everywhere and interest rates will follow, but geopolitical tensions are likely to hold any momentum in check. Our forecast for 2025 is for a modest 3% growth: decent by recent standards, but far below the average of 4.9% achieved in the first two decades of the century.

 

Perhaps a slowdown from earlier peaks was inevitable, but the fractious geopolitical environment is likely to weigh on trade for the foreseeable future.

• The Russian invasion of Ukraine has created a more polarised world. Politically friendly blocs and countries - the US, EU and others on one side, Russia, China and associated nations on the other - are trading less with perceived opponents. Trade between opposing blocs has declined by 2.4ppt more than trade within these blocs. The effect is even more pronounced in strategic sectors like machinery and chemicals.
• A particular pressure point for global trade is the strained relationship between the US and China. China’s share of US imports has fallen by almost 8ppts since tariffs were put in place in 2017. Should a hawkish Donald Trump win the US presidential election in November, a trade war between the world’s largest and second largest economies becomes a distinct possibility.
• Attacks by Houthi rebels on ships passing through the Red Sea have led to the rerouting of journeys round the Cape of Good Hope, pushing up journey times between Asia and Northern Europe by 30%. Shipping costs have risen significantly. On the plus side, the attacks only affect 9% of the world’s maritime fleet and, as yet, there are no signs of pandemic-era supply chain constraints.
• We are witnessing a global escalation in anti-trade measures. According to the World Bank, nearly 3,000 trade restrictions were imposed around the world in 2023 - five times the number in 2015. Populism and protectionism are limiting the potential of international trade.

Global trade is out of the doldrums - but only just

 

The good news is that global trade appears to have turned a corner. After a dismal 2023, we expect a return to growth in 2024 and 2025. This represents a modest rebound after the combined shocks of the pandemic, Russia’s invasion of the Ukraine and the conflict in Gaza, but a rebound nonetheless. Falling inflation and the rate cuts that will follow give us confidence that the path to growth is clear.

 

The challenge will come in keeping that momentum going in the longer term. Despite positive signs, a fractious geopolitical environment is holding trade growth back. Until it improves, an atmosphere of conflict, suspicion and isolationism will continue to limit the potential of international commerce.

Contributors:

John Lorié | Chief Economist, Atradius

Silvia Ungaro | Senior Writer, Atradius

 

 

Source: Atradius