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Global GDP bounces back but long-term threats remain

3 September 2020: Worldwide economic activity will see a strong rebound in the latter part of 2020, but according to leading economists this masks underlying issues for the long-term recovery, with global trade particularly in the spotlight.

Real-time information shows that the global economic recovery is already underway, according to the latest assessment from Oxford Economics. However, this resurgence remains patchy depending on a range of factors, including location, sector, and consumer confidence, and economic uncertainties will remain until medical advances reduce the threat from COVID-19.

In its Global Economic Forecast Report, the ICAEW research partner stated that its baseline forecast projects that world GDP has contracted by around 9% in H1 and despite a very strong rebound in Q3 of 6.4%, global growth will contract overall by -4.4% in 2020. 

 While the report predicts most of the sharp fall in GDP seen in Q2 will be offset, individual economies show a varied picture when it comes to the scale of the recovery. Trends have been encouraging in Europe, with solid V-shape rebounds in retail sales for Germany, Switzerland, the Netherlands, and some of the Nordic countries have even taken sales above their pre-outbreak levels, while South Korean sales have also been robust.

However, recoveries for the retail sector are less complete – US and UK retail sales in June just about regained pre-virus levels, with the US expanding further in July. In Spain and Portugal retail sales are still well down relative to pre-crisis peaks, as they are in both China and Japan. In Thailand – hard-hit by tourism restrictions – retail sales were 25% down on February levels in May.

Economic recovery will lose pace

After a strong rebound in Q3 following the easing of lockdown restrictions, the report foresees that the pace of growth will slow markedly in the latter stages of 2020. This trend is likely to be exacerbated by factors such as government emergency support measures being phased out and many firms restructuring their workforces.

Oxford Economics’ analysis goes on to state that fear of infection could heavily constrain activity until medical advances reduce the threat from COVID-19. According to the report, consumer confidence is inextricably linked to business confidence, and therefore investment and hiring decisions will remain subdued until significant progress on containing the health crisis is made. The quicker the risk of infection is removed, the faster consumer and business confidence will recover.

There are some green shoots, with strong momentum from H2 driving growth to 5.8% in 2021. This will see the size of the global economy recover to its pre-crisis peak by the midpoint of next year (a similar time frame as the post-financial crisis recovery).

Trade picks up, but challenges remain

The report pays close attention to an issue likely to play a large part in the world’s post-pandemic recovery - international trade. It warns that the long-term challenges present before the crisis have not gone away.

Before the pandemic, global trade was already experiencing a long-term slowdown as a result of protectionism and a changing structure of supply chains. Once the virus is brought under control and economic activity has returned to pre-pandemic levels, Oxford Economics expects this structural decline to continue as governments aim to reduce the vulnerabilities that the pandemic has exposed to the global trading system.

While the report flags an 18% year-on-year slump in the movement of goods in May as an example of the pandemic’s impact on trade, it also points out that trade generally falls by more than overall GDP in downturns. Trade tends to be closely linked to the performance of the industrial sector, which can exhibit particularly sharp fluctuations throughout the economic cycle. 

The ‘sudden stop’ in trade since March looks quite similar to that seen in late 2008 and early 2009 as a result of the financial crisis – and is dramatically worse than seen in the early 2000s ‘dot-com’ bust.

 Early indicators suggest trade bottomed out in June before picking up again in July. In the second half of 2020, Oxford Economics predicts that a significant easing of lockdowns will mean global activity will kick back into gear. Indications from Asia show the recovery could be swifter than it was a decade ago. China’s exports in April-May were already back close to the levels seen before the virus hit, and South Korean exports in July are 10% below pre-pandemic levels.

However, the report also cautions that these preliminary signs do not guarantee a rapid or sustained recovery. While much of the world has now started to emerge from lockdowns, the process may not be a smooth one: for example, localised outbreaks may continue to be a disruptive factor for some time to come.

The rise and rise of protectionism

Another reason for the slowdown in global trade flagged by the report is that of protectionism - governments restricting imports from other countries through tariffs, quotas and other regulations. According to Oxford Economics, the rise in protectionism globally has contributed to countries trading less and focusing on domestic industries, something which is expected to continue accelerating after the pandemic.

The most damaging recent trade dispute has been between the US and China, where the average US tariff on Chinese imports now stands at 19.3% – over seven times the average rate in 2017 - while the imposition of trade tariffs by the US on Mexico and Europe contributed to global goods trade slowing from 6.5% growth in 2017 to just 0.3% in 2019.

Estimates of the strength of these structural factors vary, but some studies suggest that it accounts for between half and two-thirds of the recent decline in world trade as a share of global growth, with little evidence that the trends are likely to reverse anytime soon. 

Onshoring and supply chains

On top of outright protectionism, the report also flags an increased interest in onshoring - the practice of returning a business operation originally moved overseas back to its country of origin. While onshoring was something governments were pushing for before the COVID crisis began, the report states that depending on how long the pandemic lasts, firms may seek to increase efforts to improve the resilience of their supply chains by reducing factors such as complexity and distance.

However, the report states that wholesale changes to firms’ supply chains seems unlikely. While supply chains can be reconfigured, shifting from one supplier to another will merely swap one form of risk for another. For most management teams, particularly those incentivised to maximise short-term profits, ramping up costs by onshoring is unlikely to be seen as a sensible strategy.

Another trend highlighted by the report is the changing nature of supply chains. During the 1990s and 2000s, the production process became truly global, with components of manufactured goods crossing international borders several times, leading to a surge in the value of global trade. 

This expansion has now stalled, with the report flagging the development of emerging economies moving up the value chain as a key factor. Rather than assembling foreign components, countries like China now produce a substantial share of these intermediates on its own. 

Technological changes such as automation, higher wages in emerging markets, and firms prioritising flexibility, quality, or proximity to customers have also reduced the incentive for firms to move production to low-cost centres abroad. Whether this trend will continue in the post-virus economic landscape remains, as yet, unclear.

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