Global Trade: Caught Between a Rock and a Hard Place

After the invasion of Ukraine, global trade is facing a double whammy: a confidence shock that could cost close to half a trillion dollars in demand, as well as already high price pressures surging even higher.

That’s why we now expect trade to grow by +4.0% in volume terms in 2022, -2pp lower than what was expected before the war. On the other hand, higher oil prices and a stronger dollar will drive up the cost of trade. In fact, since 2020, Brent and container freight prices have started to move in sync, which means freight rates could reach a record-high peak of USD14,000/FEU. As a result, we have revised upwards our forecast for global trade price growth by a whopping +5.7pp to close to +11% in 2022.

To add to this, it is hard to hold out hope for a normalization of supply chains this year. With major container lines rerouting ships to less direct and more expensive routes to avoid the Black Sea, congestion is likely to rise at other European ports. And air freight is complicated by the closure of critical air space.   

On the other side of the globe, renewed Covid-19 outbreaks in China are another cause for concern: With ports seeing drastically reduced activity, or even at risk of being closed to comply with the zero-Covid strategy, delivery times will remain extended through 2022. Altogether, this will push back the normalization of global supply chains well into 2023.

In this context, it is no surprise that high energy prices, geopolitical tensions and increased transportation bottlenecks are the top concerns for exporters. As I write this, the risks of a double-dip in global trade have considerably increased, and our survey confirms that pessimism has increased since the start of the war.

But companies can and will adapt their export strategies to this new normal, just like they did in 2021, the year supply-chain disruptions sent the global logistics network into crisis mode. It is a very good sign that 84% of US corporates are targeting new export markets in 2022, along with more than half in the UK, Germany, France and Italy. Another silver lining: intensified geopolitical tensions are unlikely to roll back globalization; over 40% of exporters are planning to seek out more investment for international development than planned before the war.

At the same time, and despite their comfortable cash buffers, companies are flagging financing as a risk to watch in 2022. The record-high inflation rates we are seeing around the world, fueled by the fallout from the war in Ukraine, have already kicked off monetary policy tightening in several advanced economies. We expect this trend to intensify through 2022 and 2023, which explains more funding challenges this year and why 35% of US exporters and more than half of European corporates expect an increase in non-payment risk in the next six to 12 months. Before the war broke out, only 30% felt the same.

In this context, what matters is how long the conflict lasts. The longer it continues, the higher the risk of a full-fledged demand shock that could push global trade into a recession. Things could get worse before they get better! 

The current international environment

After the optimism of the global "grand reopening" in 2021, our survey shows that 2022 could be much more of a rocky road for exporters. Both business and consumer confidence have taken a hit from the war in Ukraine, and higher commodity prices and extended supply-chain disruptions will ramp up the cost of exporting for months to come.

Three top trends stand out about the current international environment and exporters’ willingness to trade:

1. More businesses are bracing for a hit to turnovers in 2022. In the first round of our survey before the invasion of Ukraine, just 6% of companies were worried about turnover dropping in 2022; now, the share has risen to 22%, mostly in the chemicals, energy & utilities and machinery & equipment sectors. To cope with the ongoing slowdown in demand, companies are planning to diversify export markets and increase investments in new markets, proving that export ambitions remain resilient. But the longer the conflict lasts, the greater the risk of the slowdown escalating into a full-fledged demand shock, which could push global trade into a severe recession.
2. The legacy of the Covid-19 era state support is still viewed as the ultimate lifeline in crisis times. High energy prices, geopolitical tensions, increased transportation bottlenecks, sanctions against Russia and input shortages rank among the top concerns for companies. With the additional pressure of rising financing costs and currency risks, around half of the companies we surveyed believe financing support via state-guaranteed loans and direct subsidies would protect their businesses from the fallout of the war. However, in the absence of much more severe economic shock, we are unlikely to see the return of extensive “whatever it takes” policy support as seen during the Covid-19 crisis.
3. Non-payment risk is back. More than 40% of exporters expect payment terms to increase following the war and more than half expect a rise in non-payment risk in the next six to 12 months, compared to less than one third before the war. This confirms the normalization in business insolvencies that had already begun before the war, albeit still at a moderate pace. We expect global insolvencies to rise by more than +10% in 2022.

Ana Boata is the Global Head of Economic Research at Allianz Trade.