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April 25, 2022

World Growth Slows - Flexport Weekly Economic Report

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Phil Levy

Chief Economist, Flexport

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In its latest projections for the global economy, the IMF downgraded economic growth and trade prospects for almost everyone. Key drivers of the gloomy outlook were the conflict in Ukraine, monetary tightening, less fiscal stimulus, a slowdown in China, and the ongoing pandemic.

In Focus - IMF World Economic Outlook

The __International Monetary Fund__’s rose-colored glasses clouded significantly in its latest World Economic Outlook. The latest installment of the regular series called for global GDP growth in 2022 to slow to 3.6% from 6.1% in 2021. This was a downgrade of 0.8 percentage points from the IMF’s January estimate. The downgrades were even more severe for developing countries than for advanced countries.

The chart shows the growth sequence for a number of key countries and regions. All but Japan see a significant dropoff from 2021 to 2022 and for the U.S., the UK, and the Euro Area economic growth in 2023 is forecast to be lower still.

Foremost among the reasons for the IMF’s dimmer view was the conflict in Ukraine. That conflict is seen to have a severe effect on Russia and Ukraine, of course, but also significant spillovers through commodity prices, trade linkages, and labor supply, among other factors. Beyond Ukraine, there is monetary tightening, less fiscal support, and the continuing effects of the pandemic.

In addition to its GDP forecasts, the IMF offered predictions for trade volumes and commodity prices. Advanced country import volume was seen falling from a 9.5% growth rate in 2021 to 6.1% growth in 2022 and 4.5% in 2023. The comparable numbers for developing country import volume were 11.8%, 3.9%, and 4.8%. In almost every case, the numbers were marked down notably from the January forecast.

For inflation, those markdowns are even more striking. The IMF shares the view that inflation is transitory and will recede soon. It predicts 5.7% inflation for advanced countries in 2022, followed by a manageable 2.5% in 2023. But the revision was eye-popping; the 2022 inflation number was 3.4 percentage points higher than the same forecast from October 2021. Inflation has shown a nasty tendency to outlive optimistic forecasts.

As if this were not grim enough, the IMF states that risks to its forecast are large and to the downside. Among these risks it lists a prolongation of the conflict in Ukraine, geopolitical tension, the effects of rising interest rates, the ravages of the pandemic, and a slowdown in China. Stay tuned to see how this all plays out.

Latest Flexport Metrics & Research

The Flexport Ocean Timeliness Indicator for Transpacific Eastbound routes inched higher to 112 days. Flexport’s Air Timeliness Indicator for TPEB was unchanged and close to summer 2021 levels. In other research we took a deep-dive into new EU coal sanctions against Russia.

Economics Data

China’s GDP expanded 4.8% in Q1 over a year before. Much of the recent apparent slowdown related to the pandemic came at the end of the period and was thus only partially captured in the growth number.

Euro Area inflation rose to 7.4% at an annual rate in March, up from 5.9% in February. Excluding food and energy, the March rate was 3.2%. Separately, German producer prices for industrial products rose 30.9% in the year to March, the highest annual rate since the series began in 1949.

Eurozone manufacturing output dropped to a 22-month low in April while the manufacturing Purchasing Managers Index (PMI) slid to a 15-month low. Both are still expanding but suffering from continued supply constraints, factory closures in China and the conflict in Ukraine.

  • The U.S. manufacturing PMI meanwhile climbed to 59.7 (above 50 indicates neutral) from 58.8 in April including export order growth that was reportedly the fastest in a year. The S&P Global survey pointed to continued rapid increases in output costs and low levels of vendor performance, indicating stressed supply chains.

U.K. retail sales fell by 1.4% sequentially on a seasonally adjusted, weekly average real basis in March. A drop in non-store sales (internet) and auto-fuel were the main drivers. Internet sales suffered due to a return to in-person shopping while lower fuel sales partly reflecting shortages caused by environmental protests.

Japan’s international trade activity surged 22.6% higher year over year in March including a 31.2% rise in imports. As was the case with China, the latter was largely down to higher commodity prices. By volume imports of key materials including basic metals and natural gas declined. By contrast to China though imports of semiconductors increased by 11%.

  • The commodity price boom meanwhile has helped the major raw materials exports. Exports from Indonesia, led by coal, gas and palm oil climbed 44% higher than a year earlier in March. Shipments from Malaysia meanwhile, which include crude oil products, palm oil and rubber products as well electronics and solar panels jumped 25%.

Higher commodity prices also likely flattered EU trade activity. Total trade with non-EU states increased by 29.6% year over year. That included a 109% rise in imports from Russia driven by higher natural gas prices ahead of the start of the Ukraine conflict. Trade with the U.K. improved versus a year earlier but was still 4.7% below February 2020.

Politics & Regulations

The Biden administration issued a “Buy America” requirement nominally requiring government-funded infrastructure projects to use domestically-produced iron and steel. The rules did, however, include a waiver process in cases in which, for example, such a purchase “would be inconsistent with the public interest.”

Negotiations between the U.K. and India to formulate enhanced trade ties are making slow but steady progress after heads-of-state meetings this week. Key issues are U.K. access to Indian markets and investment deals while India wants improved visa access to the U.K.

  • The U.K. is also reportedly engaged in trade negotiations with individual U.S. states. While these would lack the status of a full trade deal they could yield trade-expanding measures such as reduced state regulatory barriers. A wider federal trade deal still appears to be a distant possibility.
  • Meanwhile, relations between the U.K. and EU appear to have soured once more with the British government repeating threats to withdraw from the Northern Ireland Protocol, raising the risk of a wider breakdown in trade relations. New legislation may be introduced in the next few weeks to do so.

Another round of sanctions against Russia may be coming closer after Germany’s unions and employers’ associations reportedly backed a ban on imports of natural gas. As discussed in previous Flexport research that’s one of the largest import lines from Russia but faces significant substitution challenges.

  • One alternative is for additional supplies from Norway, which have reportedly already reached a record high.

The Russian government is looking to offset the loss of export markets with a call from President Putin to increase self-sufficiency in metals production and uses. It has also suspended publication of trade statistics after similar moves regarding oil output and foreign exchange trading to “avoid incorrect estimates, speculation and discrepancies”.

Supply Chain Update

More Chinese cities are implementing COVID-19 related lock-downs. By contrast to the initial method followed in Shanghai, many of these follow a new, more flexible approach designed to ensure that critical industries can continue operators.

  • To that end the government has implemented a list of strategically important companies. That may have contributed to some key technology firms continuing their operations.

COVID-19 related plant closures are just one of the challenges facing the technology industry. One major chip manufacturing equipment producer has indicated that it sees no slowdown in demand for chips of all types and that demand will exceed supply “well into next year”. The firm is also struggling to keep up with demand for its equipment.

  • Global smartphone shipments reportedly fell by 11% year over year in Q1’22 in what is normally the quietest month of the year. That may be due to an “unsettled business environment” with challenges including rising inflation, China’s lockdowns and the conflict in Ukraine.

Chart of the Week - Vaccine Surplus Emerges

How many vaccines are enough? One of the major vaccine makers has suspended its outlook for COVID-19 vaccine sales due to a “global supply surplus and demand uncertainty” including reported supply chain challenges in emerging markets.

The distribution of vaccines has been a challenge throughout the pandemic, with centralized production in North America, the EU, United Kingdom, Russia and China. Decentralizing production to emerging economies relies on easing intellectual property rules at the WTO level, which thus far has proven problematic.

The chart above shows U.S. exports of all types of vaccines initially focused on the EU and Canada / Mexico and have now switched to emerging markets. Yet, U.S. exports have already started to decline, however, with exports in February down by 43% compared to the Q4’21 average on a days-adjusted basis.

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.

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