Global trade is often considered a barometer of economic activities between countries. In fact, there are few indicators that can reflect the overall health of the world economy more than trade data. Based on actual cross-border transactions, trade data captures demand for key products as well as factors of production, including consumer physical goods, capital goods, basic inputs and raw materials. As a result, global trade data tend to be highly sensitive to macroeconomic conditions and follow the boom and bust cycles of the economy.
Recently, after the sharp but short-lived collapse in activity following the start of the pandemic, global trade has picked up sharply. According to the Netherlands Central Planning Bureau for Economic-Policy Analysis (CPB NEPA), global trade volume has increased more than 30% since the bottom of the Great Pandemic Recession in early 2020. , well above pre-pandemic levels and comfortably reaching all-time highs. Surprisingly, this increase occurred as blockades and supply chain restrictions continued.
World trade volume
(index points, 2016-2022)
However, global trade volume data tends to give us a picture of the recent past rather than the present or near future. CPB NEPA data is released e.g. with a three-month lag, meaning their latest prints reflect trading volume from August 2022. It’s best to look at other data points, which tend to provide forward-looking rather than backward-looking information.
In our assessment, the leading indicators suggest that world trade will not continue to grow, but will slow down and even contract for a few months. Three main points support our analysis.
First, high-frequency data from major economies (the US, the Eurozone and Japan) point to a “global trade recession.” Flash surveys of Purchasing Managers’ Index (PMI) for advanced economies showed several consecutive months of slowdown in new export orders, which continued to fall in October. High inflation is having a negative impact on disposable income in major economies, dampening aggregate demand and going hand in hand with a continued slowdown in trade growth in early reports from Asian exporters (Japan, South Korea, Singapore and Taiwan). These countries tend to lead global trade as they play a key role in the supply chain of industrial activities between continents.
Main indicators of world trade
Second, forward-looking investors also expect a sharp decline. Investors’ expectations for future earnings from the transport sector, a key indicator of future growth in global trade, point to a sharp decline in demand for physical goods. The Dow Jones Transportation Average, a stock index of airlines, trucking, shipping, railroads and delivery companies that outperformed global exports by at least three months, peaked in March 2021, only to decline rapidly since then, reaching high rates of decline.
Third, movements in foreign exchange (FX) rates are also likely to play an additional role in slowing global trade. The strength of the USD, which is dependent on more aggressive rate hikes and a stronger US economy, is a major drag on global trade growth. About 40% of global trade flows are invoiced in USD, and a stronger USD makes imports from outside the US more expensive. This reduces disposable income by the same amount and even promotes import substitution of domestic products, which has a negative impact on trade volume.
Overall, world trade volume is expected to decline significantly over the coming months. The trade reflects the overall macroeconomic environment and is just another indicator of the challenging environment that has prevailed over the past few months.