Supply Lines: ECB tallies the damage

Supply Lines

With global trade enduring mounting damage from months of supply-chain disruptions, the European Central Bank has just come out with an estimate of how bad the fallout might be.

According to new research by ECB economists Simone Cigna and Lucia Quaglietti, the contraction in world commerce tied to the Covid-19 shock could be magnified by some 25% purely because of such logistical breakdowns.

"Covid-19 has struck value chains in Asia, Europe and the Americas, raising the risk of a domino effect with feedback loops that could amplify the collapse in global trade," the study said. It warned the disruption "may leave a longer-term legacy for global supply chains, leading to a review of production processes and substantial re-shoring."

Re-nationalization — bringing parts of production processes back home to reduce dependence on suppliers — has been a hot topic in places like the U.S. and Europe in recent months. But separate reports have already suggested it might actually hurt activity further.

According to the ECB researchers, a hit to demand is likely to affect economies higher up in the value chain, like the U.K., more negatively than those lower down, like Mexico.

That's because Mexico's production is particularly dependent on imported inputs, which are then re-exported as finished products. In contrast, countries positioned more upstream like Britain are likely to experience a negative impact on activity as exports decline more than imports.

"Traditional models assume that a country's imports depend on its domestic demand," according to the report. "However, in a world characterized by complex international supply chains, changes in demand in third countries are also an important determinant." 

For now, the ECB economists see bright spots ahead, as a pickup in global value chain activity could also amplify trade. The institution's most recent forecasts project world real imports (excluding the euro area) will decline at an unprecedented pace of around 13% in 2020 before returning to positive rates of growth of 8% next year and 4.3% in 2022.

Carolynn Look in Frankfurt

Charted Territory

The global trade funk dragged into May, even as coronavirus lockdowns started easing. The contraction in trade volumes narrowed to 1.1% from April, but underlying momentum  measured by three-month figures — showed further weakness: There was a 12% decline from the previous period, and a 13% drop compared with a year earlier. 

Today's Must Reads

  • Dire distribution | The industries that shepherd goods around the world on ships, planes and trucks acknowledge they aren't ready to handle the epic challenges of shipping an eventual Covid-19 vaccine from drugmakers to billions of people.
  • Call of duty | The EU let its member countries suspend import duties on medical equipment needed to fight the coronavirus for three more months.
  • Spiraling ties | As U.S.-China ties have deteriorated since the Covid-19 pandemic devastated the globe, the trade deal they signed in January has served as sort of a linchpin in the relationship. Now that also could be coming undone.
  • Truck stops here | A field inland from the White Cliffs of Dover is one of four sites the U.K. has earmarked for conversion into lorry parks for customs checks after Brexit. Meanwhile, a German industry official said the failure of trade talks between the EU and Britain is "almost inevitable."
  • Plane concessions | Airbus said it agreed to make changes to the A350 jet's repayable launch aid from France and Spain to resolve a 16-year trade dispute and remove justification for U.S. tariffs against European goods.
  • Get around | Ministers responsible for trade in Asia Pacific pledged to facilitate essential movement across borders, even as coronavirus cases surge across the region.

On the Bloomberg Terminal

  • New battles | A fresh flare-up in U.S.-China trade tensions despite a phase-one deal will widen and deepen the sales pain for global technology companies, effects that become very likely if President Donald Trump is re-elected, Bloomberg Intelligence says.
  • 2020 potential waning | The concessions needed by the U.K. to strike a trade deal with the U.S. before the presidential elections in November may be untenable, Bloomberg Intelligence analysis shows.
  • Use the AHOY function to track global commodities trade flows.
  • Click HERE for automated stories about supply chains.
  • See BNEF for BloombergNEF's analysis of clean energy, advanced transport, digital industry, innovative materials, and commodities.
  • Click VRUS on the terminal for news and data on the coronavirus and here for maps and charts.

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