The sting in Covid-19’s tail

UNCTAD expects $2 trillion to be wiped off the global income as a result of Covid-19

By 

Carly Fields,

With no end in sight to the Covid-19-related disruption to world trade, the UN Conference on Trade and Development (UNCTAD) has published a sobering preliminary economic downside scenario.

It expects a $2 trillion shortfall in global income with a $220 billion hit to developing countries (excluding China). Those hardest hit include oil-exporting countries, as well as other commodity exporters, and those with strong trade linkages to the “initially shocked economies”. These are expected to see a full percentage point wiped off their growth.

Growth decelerations of between 0.7% and 0.9% are anticipated in countries such as Canada, Mexico and the Central American region, countries knitted into East and South Asian supply chains, and countries close to the European Union.

In a technical note on the global trade impact of the epidemic, UNCTAD’s International Trade and Commodities division notes that the China Manufacturing Purchasing Manager’s Index (PMI), a critical production index, fell by about 22 points in February. This implies a reduction in exports of about 2% on an annualised basis. Meanwhile, container vessel departures from Shanghai were “substantially lower in the first half of February with an increase in the second half”.

Chinese manufacturing is essential to many global supply chains, especially those related to precision instruments, machinery, automotive and communication equipment. “Any significant disruption in China’s supply in these sectors is deemed to substantially affect producers in the rest of the world,” says UNCTAD.

The most impacted economies are forecast to be the European Union (machinery, automotive, and chemicals), the US (machinery, automotive, and precision instruments), Japan (machinery and automotive), the Republic of Korea (machinery and communication equipment), Taiwan Province of China (communication equipment and office machinery) and Vietnam (communication equipment).
 

Container hit

Illustrating the decline, the Freightos Baltic Global Container Index has fallen 237 points since Jan 15 – a drop of 15% – highlighting the weakness of the China-reliant container sector. While the Chinese economy has “taken its first careful steps back to work,” according to Freightos, “getting back to normal will take some time and there’s still a lot of uncertainty”.

New Covid-19 cases in China have dropped to their lowest level since late January and all 14 temporary hospitals have been closed this week in Wuhan – the epicentre of the outbreak.

Ocean carriers had been forced to cancel scheduled sailings, but with ports beginning to unclog as workers return from their extended Lunar New Year break and factories ready to start production again, hopes are rising for a container return. “Though rates have decreased due to low demand, the expectation is that once production is back to near-normal levels, prices will spike to accommodate the backlog,” says Freightos.

Travel within most Chinese provinces has almost returned to normal, with interprovince trucking now operating at about 80% capacity – “a big improvement over previous weeks”, according to Freightos. “We are still looking at likely delays and increased freight rates for the near future, but recovery has definitely begun.”
 

Economy fears

But just as China takes tentative steps to re-open, Europe is facing its own virus demons with the epidemic far from over on the global stage. Consequently, supply chain disruption will continue and the longer-term damage to the global economy and consequently trade prospects cannot be ignored.

“Back in September we were anxiously scanning the horizon for possible shocks given the financial fragilities left unaddressed since the 2008 crisis and the persistent weakness in demand,” Richard Kozul-Wright, UNCTAD’s director of globalisation and development strategies, said. “No one saw this coming – but the bigger story is a decade of debt, delusion and policy drift.”

While some parallels can be drawn with the Asian financial crisis of the late 1990s that crisis occurred before China’s economic dominance in the region and when advanced economies were in reasonably good economic shape. This, says UNCTAD, is not the case today.

Further, China is now an important source of long-term finance for developing countries – and to the shipping sector – and a curtailment of funds will be a nasty sting in the tail of Covid-19.

Mr Kozul-Wright warns that on an economic front the Central Banks cannot solve this crisis alone and appropriate, internationally co-ordinated macroeconomic policy responses will be needed.

“Ultimately,” he said, “a series of dedicated policy responses and institutional reforms are needed to prevent a localised health scare in a food market in Central China from turning into a global economic meltdown.”
 

Getting back into China

Freightos has listed some steps to take to help get China trade back on track:

- Anticipate delays in getting goods out of China. Unfortunately, much of this is out of suppliers’ control.
- Check directly with suppliers to confirm the order ready dates.
- If goods need to be trucked between provinces, first confirm with the factory that goods are ready, and then consult with the freight forwarder to make a plan for maximum efficiency.
- If possible, book any upcoming shipments with an available ready date to get goods moving as quickly as possible.
- Consider shipping LCL instead of FCL in the short term to minimise chances of getting rolled.
- If the order is not urgent, consider delaying the shipment until some of the backlog has cleared and freight rates likely return to normal.
- If production is at an early stage, consider sourcing outside of China.