The divergence between East and West puts additional pressure on supply chains and prices and raises yet more concerns about the effect of inflation on corporates in the second half of 2021. In this quick-take, Economist Peiqian Liu takes a closer look at some of the latest trade trends and explains why transportation costs, margin and supply pressure should recede as reopenings continue.
Trade growth has swung back in favour of the UK and Europe: reopenings are driving better trade performance but Brexit is still weighing on UK imports from the European Union.
Asia has seen a slowdown, driven by the Delta variant: the latest data shows a partial recovery in exports, but broadly slower growth has exacerbated supply chain and price pressures.
Like most pandemic-driven inflation elsewhere, we expect price rises to be transitory: shipping costs, margin and supply pressure should recede as reopenings continue.
The UK and Europe are outperforming
Regional trade performance was highly varied overall, but the biggest trade growth at the end of Q2 was seen in the UK and Euro area, driven primarily by reopenings.
Exports from UK increased by almost 8% month-on-month in May, witnessing a rebound from their Brexit-induced lows at the beginning of the year, and exports to the European Union (EU) rose 9% during the same period. Exports outside the EU also continue to grow at an encouraging pace (6.4% in May).
But despite the positive momentum driven by reopening, the effects of Brexit continue to weigh on the UK. Imports from EU remain low in comparison to the levels seen at the end of 2020 and are 12% lower than the pre-pandemic levels. With only one new post-Brexit free trade deal in hand (with Australia, agreed in June 2021) and tensions rising with the EU over the Northern Ireland Protocol, the longer-term outlook still remains unclear.
New trade milestones in Q2 but Asia is being weighed down by the Delta variant
Still, the latest trade data show global trade volumes grew 25% year-on-year heading into summer, owed in large part to a low base (in June 2020, many countries were still knee-deep in pandemic restrictions). Still, and despite contracting slightly (0.3%) in May, world trade volumes are now at 5.5% above pre-pandemic levels, with only the UK and the Middle East & Africa region remaining the exceptions – the former driven by Brexit and the latter by slow progress containing the virus.
Sources: CPB Netherlands Bureau for Economic Policy Analysis, NatWest Markets. 3mma = 3-month moving average.
Recently, we’ve started to see a broad reversal in global trade growth patterns. At the end of 2019, a few months before the world cascaded from East to West into lockdown, many countries saw strong trade growth on the back of an improving global growth outlook. After the pandemic hit, Asian economies that were first to impose restrictions were also first to emerge from their grip while Europe and the Americas lagged behind.
Now, new social restrictions put in place to contain the spread of the Delta variant in Asia is weighing on trade in the region, exacerbating supply chain pressures and driving up the cost of moving goods from East to West. As the chart below shows, the largest trade performance declines were concentrated in Emerging Asia, China, and Japan (though partial data from June does show a modest recovery in exports from Asia).
Sources: CPB Netherlands Bureau for Economic Policy Analysis, NatWest Markets. Pre-Pandemic = December 2019. Previous month = May 2021
Should corporates be concerned about sticky price rises?
Forward-looking business surveys from July suggest a rapid rebound in economic activity continues to generate supply shortages and price pressure. Global suppliers’ delivery times stretched further to record lengths and backlogs of work dipped only slightly from a very high level in July, while rising congestion at ports coupled with the inability of supply to catch up with increasing demand for containers has driven shipping costs to stratospheric heights. At the end of July, global sea freight rates for container shipping reached 5.8 times their levels in January 2020, with the highest increases for shipping routes operating from Asia to Europe.
Sources: Freightos Baltic Container Freight Rate, NWM; Index: January 2020=100
Are shipping price rises here to stay – and for how long? We think costs will start to fall as more economies reopen through the second half of this year, and we do not expect rising transportation costs to be a longer-term driver for inflation or margin pressure.
These rising costs, coupled with supply bottlenecks, have pushed up raw materials costs significantly but we have seen limited pass through to consumer sectors. In China for example, the producer price index (PPI) – which measures input costs for producers – has advanced to a decade-high of 9% but consumer price inflation (CPI) remains subdued at around 1% and well below the government target (3%). In the UK, inflation topped 2.4% in June, and in the US, the core CPI measure has picked up in recent months, but in both cases the drivers are reopening-related service components and are expected to be transitory.
Going forward, as supply challenges recede, further increases in trade growth in the second half of 2021 could be supported by the high backlogs that exporters will need to fulfil, as well as inventory build-up. However, the main risk to be mindful of is that there could be a sizeable slowdown in the pace of recovery as compared to last year or so.
Login to Agile Markets to read the full analysis or ask your NatWest C&I representative about how you can sign up.
This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.
This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.
NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.