With the growing Covid-19 pandemic and associated lockdown measures affecting economies, global trade is expected to see a year-on-year drop of around 18.5% in the second quarter of 2020, said the, said the World Trade Organisation (WTO) in a new report.

However, rapid government responses helped temper the contraction, and WTO economists now believe that while trade volumes will register a steep decline in 2020, they are unlikely to reach the worst-case scenario projected in April.

The WTO's April 20th annual trade forecast, in light of the large degree of uncertainty around the pandemic’s severity and economic impact, set out two plausible paths: a relatively optimistic scenario in which the volume of world merchandise trade in 2020 would contract by 13%, and a pessimistic scenario in which trade would fall by 32%.

As things currently stand, trade would only need to grow by 2.5% per quarter for the remainder of the year to meet the optimistic projection. However, looking ahead to 2021, adverse developments, including a second wave of Covid-19 outbreaks, weaker than expected economic growth, or widespread recourse to trade restrictions, could see trade expansion fall short of earlier projections.

"The fall in trade we are now seeing is historically large – in fact, it would be the steepest on record. But there is an important silver lining here: it could have been much worse,” said Director-General Roberto Azevêdo.

"This is genuinely positive news but we cannot afford to be complacent. Policy decisions have been critical in softening the ongoing blow to output and trade, and they will continue to play an important role in determining the pace of economic recovery. For output and trade to rebound strongly in 2021, fiscal, monetary, and trade policies will all need to keep pulling in the same direction."

Looking ahead to next year, a slower-than-expected pace of economic recovery would weigh on trade growth, which is possible for 2021 come in at closer to 5%, which would leave it well below the pre-pandemic trajectory. On the other hand, a quick return to its pre-pandemic trajectory would imply trade growth in 2021 of around 20%, in line with the April forecast’s optimistic scenario. Monetary, fiscal and trade policy choices will play a significant role in determining the pace of recovery.

The outlook for the global economy over the next two years remains highly uncertain. This is reflected in the range of GDP estimates from other international organizations, in some cases relying on multiple scenarios. The World Bank, OECD and IMF have all released forecasts showing significant slowdowns in global trade and GDP; all are broadly consistent with the WTO's forecast for the current year.

The World Bank's recent forecast would see global output decline by 5.2% in 2020, falling between the WTO's optimistic and pessimistic range. Other international organizations' GDP forecasts for 2020 are also increasingly negative, even as their trade projections stay roughly in line with the WTO's optimistic scenario. These estimates imply a less negative trade response to declining GDP growth than was observed during the global financial crisis of 2008-09.

The responsiveness of trade to changes in income can be measured by the ratio of the growth of merchandise trade volumes to real GDP growth at market exchange rates, also referred to as the income elasticity of trade. The implied elasticity under the WTO's optimistic forecast for 2020 was 5.3 – in line with that seen during the financial crisis.

Although purchases of consumer durables such as automobiles fell sharply earlier in the crisis, other economic sectors have shown signs of resilience in recent weeks. Sales of consumer electronics have thus far held up better than might have been expected, supporting international trade in these products.

For example, according to China's customs statistics, the country's exports of automatic data processing machines, including computers, were up 30% year-on-year in US dollar terms in April. Anecdotal evidence similarly points to strong demand for computer and information technology services, which have facilitated working from home during the crisis.

Automobile sales have also rebounded from recent, though admittedly extreme, lows. For example, sales of cars in China were up 5% year-on-year in May after falling 79% in February. – TradeArabia News Service