As experts analyze the potential for economic downturns in major global economies, a plethora of recent data underscores the existing downturn in global trade. China, the world’s largest exporter, recently reported the most significant contraction in overseas shipments since the onset of the Covid-19 pandemic in February 2020. Germany, the third-largest global exporter, experienced a substantial decline in exports in the latest monthly data, marking the sharpest year-on-year drop since early 2021.

The United States, holding the second position in global exports just behind Germany, also witnessed a contraction in exports up to June this year. However, the American economy is finding renewed optimism due to a crucial factor that many of its counterparts lack: robust domestic demand.

This trend is not isolated. Several countries with resilient internal dynamics are standing out. Indonesia, the largest economy in Southeast Asia, managed to accelerate its growth last quarter despite a significant drop in exports caused by plummeting prices of key commodities like crude palm oil, coal, and iron. India’s expansion is projected to have strengthened in the last quarter due to increased investment.

For economies heavily reliant on service industries in nations with strong job markets and income growth, fears of a harsh economic decline seem exaggerated. However, until the global manufacturing cycle manages to reduce excess inventories, export-oriented economies will continue to impede worldwide growth.

“In recent months, both sectoral and regional disparities have emerged” in the global economy, noted economists Joseph Lupton and Bruce Kasman of JPMorgan Chase & Co. They highlighted the heightened sensitivity of Europe and China to the industrial cycle as a significant aspect of this divergence.

China’s export decline has left it particularly vulnerable, with consumer confidence at low levels and a property market slump hindering recovery from last year’s pandemic-induced lockdowns. Germany’s weakened exports have resulted in sluggish industrial production, hitting a six-month low and complicating its exit from a recession earlier in the year.

The concern lies in the possibility that the weaknesses observed in Europe and China could propagate to the United States and the rest of the world, as pointed out by Lupton and Kasman. Eventually, they anticipate a reversal in the goods-production cycle, but for now, a multitude of negative data prevails:

  • India’s merchandise exports plummeted by 22% in June compared to the previous year.
  • Taiwan’s exports experienced an 11-month consecutive decline.
  • Vietnam is stuck in its longest spell of dwindling foreign shipments in 14 years.
  • Canada’s trade balance for merchandise recorded a second consecutive monthly deficit in June due to falling exports.

Recent figures also reveal a reshuffling in global trade patterns, as Western nations led by US President Joe Biden strive to reduce dependency on China and Russia. Mexico has regained its status as the top exporter to the US, displacing China to third place after Canada. China’s data indicates a drastic 23.1% drop in shipments to the US in July, with exports to other markets like Japan, South Korea, Taiwan, the European Union, and Australia also witnessing double-digit percentage decreases. However, shipments to Russia surged by 73% this year.

China’s share of Germany’s total exports decreased to 6% in the first half of this year from 8% in 2020, according to the Kiel Trade Indicator gauge. More broadly, there’s growing concern in Europe about an increasingly skewed trade flow pattern with China, particularly as Chinese electric vehicle shipments to the continent surge. Beijing counters that the trade gap is due to the EU’s export controls.

A.P. Moller-Maersk A/S, one of the world’s largest shipping companies, recently predicted that global container trade might contract by as much as 4% this year, surpassing their earlier forecast of a 2.5% decline. Vincent Clerc, CEO of Maersk, attributed this projection to various factors including rate hikes, recession risks, uncertainties about China’s GDP growth, and demand in the coming year.

Maitreyi Das, an economist at HSBC Holdings Plc, noted that higher interest rates and persistent inflation have impacted real income, particularly in developed markets, leading to reduced demand for goods. The team at Oxford Economics also cautioned that the global economy’s growth is likely to remain weak in the next few quarters, with their baseline forecast suggesting that advanced economies might slip into negative territory by the end of 2023 or early 2024.

However, amidst these concerns, there are glimmers of hope. Data from Taiwan, a crucial player in global supply chains due to its semiconductor industry, indicate a slowing decline in chip exports. If the global goods cycle does indeed reverse, economic models suggest that a turnaround in China could foreshadow broader strength in other regions, as highlighted by JPMorgan’s Lupton and Kasman.