The silver lining for global trade

In focus – The silver lining amid muted global trade: normalizing supply chains

• After resilient performance in the first half of 2022, global trade deteriorated in the second half of the year and is likely to remain muted in 2023. However, China’s reopening reduces the risk of sudden stops in global supply chains, while moderately supporting global demand.
• We are revising slightly on the upside our forecast for global trade growth in volume in 2023, from +0.7% to +0.9%. Price effects should still be negative, resulting in a yearly contraction of global trade in value terms in 2023.
• For inventory management and supply chains, lessons have been learnt from the Covid-19 and post-Covid shortages. In fact, oversupply is likely to prevail in 2023 amid weakening demand, replenished inventories, increased capex and normalizing shipping conditions.
• Today’s oversupply has also been exacerbated by the expansion of ocean carriers’ fleets in 2022 (+4% y/y in number of vessels) using the excess cash generated by record-high shipping rates in 2021. In this environment, shipping costs are returning to their pre-pandemic levels.
• While cyclical conditions reduced supply-chain disruptions, we are not fully rid of the risk of shortages, given a widening trade finance gap, the need for better and more infrastructure and geopolitical tensions.

China – The reopening is going well, but don’t get too excited

The post-Covid reopening is going well so far, though things are not fully back to normal yet. More than a month since the faster-than-expected full relaxation of Covid-19 measures, and roughly one month before 2023’s first batch of hard macro data releases, we think it is a good moment to do a pulse check on how China’s post-Covid reopening is going. Mobility within cities has shot up quickly, exceeding last year’s and pre-pandemic levels in the past few weeks (see Figure 6). However, other measures suggest that all is not back to normal yet. Long-distance travel clearly improved from last year, but still remain less than half the volumes observed before the pandemic, while cross-border travels were less than 40% of the pre-pandemic level in early February. Overall, high-frequency indicators are all going in the right direction, and point to a rebound in private consumption in 2023.

A post-Covid rebound in private consumption is on the cards in 2023, but should be milder compared with 2021 or other countries’ experience. We expect private consumption to grow by +8.2% in 2023 (compared with +12.3% in 2021). On the positive side, improving confidence and a normalization of mobility support a normalization in household spending patterns. Furthermore, soft data already show improvements in the labor market (e.g. the recruitment index of the CKGSB survey, which improved for two consecutive months as of January 2023). However, the strength of the consumer rebound is mitigated by two main factors: 1/ excess savings are not as abundant as in other countries and 2/ the real estate sector will not experience a strong trend reversal. On the former factor, we estimate that Chinese households’ savings rate was on average 4pps higher than its pre-pandemic long-term average through 2020-2022 (see Figure 7). We estimate that this adds up to RMB3.4trn in excess savings, i.e. 2.7% of 2023 expected nominal GDP. This is low compared to other countries (e.g. as high as c.15% of GDP in some European countries). On the latter factor, the performance of the property sector (and in particular, housing prices) tends to affect household confidence as properties are the main component of households’ wealth.

Policymakers will do what is necessary to stabilize the real estate market – but don’t expect a strong trend reversal. Data released this week show the housing price index based on 70 cities stabilizing (at +0.1% m/m), after five consecutive months of sequential declines. This is consistent with recent policy moves, with regulators putting in place a mechanism that allows cities facing housing-price declines to set mortgage rates for first-time homebuyers below the official floors. While prices may be stabilizing, other data suggest that the amount of sales is still weak. High-frequency data show that transaction volumes in the 30 main cities declined by nearly -25% y/y so far in February. January credit data showed a deceleration in household medium-to-long term loans (which are mostly mortgages). Going forward, policymakers are likely to retain an accommodative stance to maintain a stabilization in housing prices, make sure that already begun construction projects can be brought to completion and avoid any systemic risk. That said, we do not foresee a strong trend reversal in the real estate sector, given that authorities likely aim for consolidation among developers, and their long-held stance is that “housing is for living in, not for speculation”.

We expect the Chinese economy to grow by +5.0% in 2023 and +4.8% in 2023 (compared with consensus expectations at +5.2% and +5.0%, respectively) – see Figure 8. Net exports are likely to contribute negatively to overall growth in the context of slowing external demand (and improving imports). Private consumption will be the main positive driver, while an overall still accommodative policy stance should support investment. The kicking off of the annual “lianghui” parliamentary meetings in early March will provide more details into authorities’ plans for this year, with official economic targets for 2023 to be revealed on 5 March.

In focus – The silver lining amid muted global trade: normalizing supply chains

After resilient performance in the first half of 2022, global trade deteriorated in the second half of the year and is likely to remain muted in 2023. Despite disruptive events in H1 2022 (start of the war in Ukraine, long lockdowns in China etc.), global trade of goods grew by +4.1% y/y during that period (see Figure 9). However, weakening global demand amid sustained inflation, the long replacement cycles of durable goods and depleted excess savings have reversed the trend. From a supply and manufacturing perspective, while the situation differs from one sector to another, corporates generally show no signs of increasing stocks in the short-term. In fact, an inventory glut is visible, and particularly destructive for retailers. With most of these factors set to persist in 2023, trade growth is likely to remain muted this year.

However, China’s reopening reduces the risk of sudden stops in global supply chains, while supporting global demand (moderately). On the supply side, several critical intermediate goods are produced, transited and shipped out of China (and Asia). Normalizing domestic and port logistics bode well for global manufacturing-supplier delivery times, which are back towards the long-term average (see Figure 10). Maritime freight rates for routes from China to Europe and North America also mostly returned to their respective pre-pandemic levels at the beginning of this year.

From a demand perspective, the more optimistic economic outlook for China implies an upwards revision of Chinese imports in 2023 by nearly USD80bn. In absolute terms, the exporters that will benefit the most from this increase are likely to be in Hong Kong (+USD13bn of additional export gains in 2023), the US (+USD6bn), South Korea (+USD5bn), Japan (+USD5bn) and Germany (+USD5bn) – see Figure 11.

We are revising slightly on the upside our forecast for global trade growth in volume in 2023, from +0.7% to +0.9%. Our updated global trade model[4] points to a quarterly profile of slight q/q contractions in global trade of goods and services in Q4 2022, Q1 and Q2 2023, before a moderate recovery in Q3 and somewhat of a firming up in Q4 (see Figure 12). Global trade of goods and services in 2024 is also slightly revised on the upside, expected to grow by +3.9% in volume terms (instead of +3.6% previously expected). We still expect price effects to be negative in 2023 (resulting in a yearly contraction of global trade in value terms) in the current context of a normalization in supply chains and the price of trade.

For inventory management and supply chains, lessons have been learnt from the Covid-19 and post-Covid shortages. Oversupply is likely to prevail in 2023. Destocking amidst the early stages of the Covid-19 crisis in 2020 and ensuing capacity mismatches and supply-chain disruptions into 2021-2022 have pushed more companies to adopt the just-in-case model of inventory management (instead of just-in-time). As a result, after more than a year of supply-chain disruptions illustrated by shortages of critical goods, extended transportation delays and costs of inputs shooting up, our in-house indicators tracking the global supply-demand balance suggest a situation of oversupply since Q4 2022 (see Figure 13). Our indicator measuring production shortfall reached the lowest level since 2011 in the US, and the lowest since early-2020 in the Eurozone. Ample supply and some stabilization in supply chains are likely to prevail this year on the back of weakening demand, replenished inventories, increased capex and normalizing shipping conditions (higher capacity, easing port congestion and sinking spot freight rates).

Today’s oversupply has also been exacerbated by the expansion of ocean carriers’ fleets in 2022 (+4% y/y in number of vessels) using the excess cash generated by record-high shipping rates in 2021. At the time, limited capacity could not keep up with the pattern of post-pandemic overconsumption. Now, however, increased capacity has led to accelerated deliveries. Shipping companies already saw a contraction in the number of containers loaded in Q4 2022. They have also warned that they expect demand to remain weak in the first quarters of 2023 amid persistent inflation and companies’ need to dispose of existing inventories.

In this context, shipping costs are nearing their pre-pandemic levels. At the beginning of 2023, the average spot price for maritime transportation was USD2,135/forty-foot box (-77% y/y) and by mid-February it fell to USD1,997/forty-foot box (see Figure 15, left panel) as a result of persistent recession fears that have halted new orders. Because almost 90% of traded goods are transported by sea, companies in the maritime industry are expecting a revenue contraction of -34% y/y in 2023 and -7% y/y in 2024, after two profitable years. The financials of the 15 largest players in the shipping sector show that revenues jumped by +78% y/y in 2021 (totaling USD305bn) while the preliminary data for 2022 indicates growth of +25% y/y, amounting up to USD380bn (see Figure 15, right panel).

While cyclical conditions have reduced supply-chain disruptions, we are not fully rid of the risk of shortages. In the short-term, tightening funding conditions and rising interest rates are affecting companies and could potentially widen the trade finance gap (see Figure 16). This shortfall of funding means that some trade flows cannot materialize, potentially hindering the normal functioning of parts of supply chains. Another risk stems from infrastructure quality and availability[5]. After all, adding containers and ships without increasing the domestic infrastructure to load and unload them would still lead to congestions in shipping. The US planned USD17bn of additional spending on port infrastructure and waterways in late-2021, but the EU is still lacking a large-scale investment plan. Finally, geopolitical tensions could also be a source of shortages – as evidenced by the war in Ukraine. Trade tensions and protectionism can also affect the availability of traded goods (e.g. US ban on semiconductor exports to China, China’s ban on export of technology used to make solar panels etc.). Widely discussed trade patterns such as reshoring[6], nearshoring[7] and onshoring[8] (see Figure 17) could help in dissolving supply-chain bottlenecks, but they seem be more talk than walk and the large-scale feasibility can be questioned.

[4] We consider a non-causal Auto-Regressive Distributed Lag (ARDL) model where global trade growth is regressed on its own lags and on global GDP growth, global industrial production growth and change in oil prices. We set the maximum lag order at 4 and the minimization of information criteria indices implies that in the end we select an ARDL(2, 1, 2, 1) model.
[5] And related to this potential labor shortages.
[6] Reshoring: Returning the production and manufacturing of goods back to the company’s original country. This applies to companies that already have production sites abroad.
[7] Nearshoring: Setting up production near to the company’s national borders, aiming to reduce transit times and ease their own supply chains.
[8] Onshoring: Companies deciding to set up their production within their national borders. This applies to companies that have never manufactured their goods overseas.

These assessments are, as always, subject to the disclaimer provided below.

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