Global trade growth expectations have been successively downgraded over the past twelve months and year end 2023 numbers are likely to come out at about around 1%, according to December estimates prepared by the OECD. Long haul trade may even be solidly negative based on what we have been seeing for key trade generators such as China, the European Union, and the United States. Trade growth can only pick up if manufacturing activity does the same. The bulk of world trade consists in the movement of industrial inputs, intermediate and capital goods. As such global trade and industrial production are directly linked. Manufacturing has been weak all throughout 2023, but an improvement could take place in the second and third quarter of 2024.
Trade Performance in 2023 and Expectation for 2024
Trade growth has been extremely volatile for the last five years. After a weak 2019, worldwide shutdowns led to a decline of almost 8% in 2020, followed by a strong recovery in 2021 and reasonably strong growth in 2022. 2023 growth was initially expected to be reasonably positive – around three percent was the expectation at the end of 2022, but this outlook has successively deteriorated over the past 12 months with slightly positive or even negative a possibility.
The big economies China, the US, Japan and Germany have exerted a strong downward pull on global trade growth. A recovery of sorts is expected for 2024, but Chinese and US trade growth is expected to continue to lag behind the rest and particularly countries in Southeast Asia. Much of the growth appears to be coming from smaller countries, but of course this does not move the global needle all that much.
The Movement of Intermediate Goods
Most trade is not in finished goods (destined for sale) but consists in industrial inputs, intermediate goods and capital equipment (machinery and so on). The tables below provide an overview of imports into and exports from the European Union and the United States. Specifically, only about one third of EU imports by air and one fifth of exports by air are finished goods. The remainder consists of intermediate and capital goods. The share of finished goods imports has decreased over time. Ocean imports and exports have a higher share of finished goods, but almost 60% of trade weight consist in intermediate and capital goods. The picture for the United States is similar, except that finished goods play a lesser role in containerised exports.
The majority of Chinese exports and imports also consist of intermediate and capital goods. Predictably, the share of intermediate goods is higher on the import than on the export side. Interestingly, the share of finished goods on the export side has been decreasing while increasing on the import side. Clearly, we are seeing a shift of Chinese trade away from mere assembly to more component production or supply of intermediate goods. The textile business is a case in point – the share of apparel and footwear as a percentage of total Chinese exports has decreased as production has shifted to lower cost Southeast and South Asian locations.
Manufacturing Performance
Before trade can pick up, manufacturing needs to do the same, particularly in those economies that drive global output. The figure below provides an illustrative view of manufacturing value added in 2022. Global manufacturing is concentrated in Asia, Europe, and North America. China, Japan and South Korea dominate manufacturing in Asia, while Germany, Italy, the United Kingdom and France are the most important European manufacturing locations. Americas are dominated by the US and to a much lesser extend Mexico and Brazil. Middle East and South Asia primarily consist of India and Türkiye. African manufacturing does not matter on a global scale – at least not yet. This should not be understood as a qualitative assessment of the importance of individual countries – we are firm believers that every market matters – but the fact is that global economic activity is dominated by just a handful of countries.
Manufacturing activity in many of these key locations did not have a good year in 2023. The interactive map below provides and overview of historical manufacturing performance since 2020 for many countries worldwide. Clicking on an individual country will highlight the series and forecast for each country. The chart includes a summary series for the Euro Area in addition to individual country detail.
Manufacturing Outlook in 2024
The two charts below show a forecast for manufacturing purchasing manager indexes (as a proxy for manufacturing output) and industrial production for the next four quarters. While the expectation across the Asia Pacific region is positive for all quarters, recovery in the Americas and Europe is not expected before the 3rd or 4th quarter of the year. If that transpires it will continue to weigh on transatlantic, transpacific and Europe to Asia trade. The bright spot at the moment appears to be intra-Asian trade – particularly as China continues its pivot away from Northeast to Southeast Asia.
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