WTO barometer shows steep drop in trade but hints at nascent recovery

World merchandise trade likely registered a historic fall in the second quarter of 2020, according to the latest reading of the World Trade Organisation's (WTO) Goods Trade Barometer.

The barometer is a real-time gauge of trends in global trade.

Additional indicators point to partial upticks in world trade and output in the third quarter, but the strength of any such recovery remains highly uncertain.

An L-shaped, rather than V-shaped, trajectory cannot be ruled out.

Released on Wednesday, the current barometer reading of 84.5 is 15.5 points below the baseline value of 100 for the index and 18.6 points down from the same period last year.

This reading – the lowest on record in data going back to 2007, and on par with the nadir of the 2008-09 financial crisis – is broadly consistent with the WTO statistics issued in June, which estimated an 18.5 percent decline in merchandise trade in the second quarter of 2020 as compared to the same period last year.

The exact extent of the fall in trade will only be confirmed later this year when official trade volume data for the period from April to June become available.

All of the barometer's component indices remain well below the trend, with many registering historic lows, although some have begun to stabilise.

Indices for automotive products (71.8) and air freight (76.5) are by far the worst on record since 2007. Container shipping (86.9) also remains deeply depressed.

Export orders (88.4) show signs of recovery as this index has turned upward. Meanwhile, indices for electronic components (92.8) and agricultural raw materials (92.5) have held up relatively well, showing only modest declines.

The WTO's June statistics implied a 14 percent drop in global merchandise trade volume between the first and second quarters of this year. This estimate, together with the new Goods Trade Barometer reading, suggests that world trade in 2020 is evolving in line with the less pessimistic of the two scenarios outlined in the WTO's April forecast, which projected that the volume of merchandise trade this year would contract by 13 percent compared to 2019.

However, as WTO economists warned in June, the heavy economic toll of the Covid-19 pandemic suggests that the projections for a strong, V-shaped trade rebound in 2021 may prove overly optimistic.

As uncertainty remains elevated, in terms of economic and trade policy as well as how the medical crisis will evolve, an L-shaped recovery is a real prospect. This would leave global trade well below its pre-pandemic trajectory.

The Goods Trade Barometer is designed to gauge momentum and identify turning points in world trade growth. Readings of 100 indicate growth in line with medium-term trends, readings greater than 100 suggest above-trend growth, while those below 100 indicate below-trend growth.

In normal times, the Goods Trade Barometer anticipates changes in the trajectory of world trade by a few months. However, the sudden, unexpected nature of the Covid-19 crisis may have profoundly altered economic behaviour and patterns, reducing the predictive value of the standard set of indicators.

In this fast-changing environment, high-frequency (i.e. daily or weekly) statistics, made possible by advances in data processing and collection, may provide analysts with early signals of recovery in economic activity and trade. Other statistics may capture shifts in consumer and business sentiment.

Modest increases have already been recorded for several of these indicators related to trade;such as those tracking commercial flights and port calls by container ships. The same is true for indicators such as copper futures as well as a measure of sentiment in news reports about economic expectations.

The WTO will continue to monitor trade developments during the crisis, including unconventional and high-frequency economic indicators.