UK exports to take until 2023 to reach pre-pandemic levels

UK exports will increase by £55bn in 2022 but won’t return to pre-pandemic levels until 2023, according to Euler Hermes’ latest Global Trade Report.

The insurer forecasts next year’s growth will come on top of a forecasted £18bn increase in 2021, although these gains were offset by a £100bn trade loss in 2020.

The world’s largest trade credit insurer expects those firms in the UK’s services (£30bn) and automotive manufacturing (£3.4bn) sectors to be among the biggest winners, with exports to the US, Germany and Ireland registering the strongest growth.

Global supply-chain disruptions will remain high until H2 2022

Global supply chain disruptions could remain high until H2 2022 amid renewed Covid-19 outbreaks around the world, China’s sustained zero-Covid-19 policy and demand and logistic volatility during Chinese New Year, according to the research. Nevertheless, the trade credit insurer expects trade growth to remain strong globally through 2022 and 2023, with some clear winners across regions and sectors.

After an exceptionally strong performance since H2 2020, global trade of goods contracted in Q3, especially in advanced and emerging economies. However, advanced economies are suffering more from supply chain bottlenecks rather than trouble with demand.

Euler Hermes finds that production shortfalls are behind 75% of the current contraction in global volume of trade, with the rest explained by transport delays. Looking ahead, rapidly growing orders for new transportation capacity (6.4% of the existing fleet) should turn operational towards the end of 2022 while increased spending on port infrastructure in the US should significantly ease global shipping bottlenecks.

Ana Boata, head of economic research at Euler Hermes, said: “The UK’s export growth will be welcomed by beleaguered British businesses, but Brexit’s stifling effects will continue to stymy what should have been an even healthier recovery next year. Currently, 20% of current delays in suppliers’ delivery times could be explained by Brexit, with the rest attributable to global bottlenecks.

“Those in the automotive industry – which has felt the double impact of Brexit and Covid-19-induced shutdowns the most – will be one of the biggest winners, though it’s worth noting that many of its gains come from a weaker starting point. Those hoping 2022 is the year exporters see out the disruption wreaked by Covid-19 will be disappointed – we don’t anticipate trade will recover to its pre-pandemic levels until 2023 at the earliest.”

When it comes to inputs from China, Europe is losing the tug-of-war against the US

Europe is more at risk compared to the US when it comes to the heavy reliance on intermediate inputs from abroad. Without production capacity increases and investments in port infrastructure, the normalisation of supply bottlenecks in Europe could be delayed beyond 2022 if demand remains above supply capacity. Euler Hermes finds that the household equipment, consumer electronics, automotive and machinery and equipment sectors are most vulnerable to input shortages.

“China is a key downside risk for Europe. we estimate that a 10% drop in EU imports from China could be a drag of more than -6% on the metal sector, more than -3% on the automotive sector (incl. transport equipment) and more than -1% on computer and electronics,” says Ano Kuhanathan, Senior Sector Advisor at Euler Hermes.

Yet, reshoring and nearshoring will remain more talk than walk

Despite the ongoing global supply-chain disruption, Euler Hermes finds no clear trend of reshoring or nearshoring of industrial activities so far. The only exception is the UK, which is likely to have faced disruptions due to Brexit. However, protectionism reached a record high in 2021 and should remain elevated, mainly in the form of non-tariff trade barriers (e.g. subsidies, industrial policies).

Overall, global trade will grow by +5.4% in 2022 and +4.0% in 2023

While there is a risk of a double-dip in Q1 2022, Euler Hermes expects a normalization of international trade flows in volume from H2 2022, driven by three factors:

  1. A cooling down of consumer spending on durable goods, given their longer replacement cycle and the shift towards more sustainable consumption behaviors.
  2. Less acute input shortages as inventories have returned to or even exceeded pre-crisis levels in most sectors, and capex has increased (mainly in the US).
  3. Reduced shipping congestions (global orders for new container ships have reached record highs over the past few months, amounting to 6.4% of the existing fleet) and the planned USD17bn spending on port infrastructure in the US.

“Overall, we expect global trade in volume to grow by +5.4% in 2022 and +4.0% in 2023, and then gradually return to its pre-crisis average levels. However, this comes at the expense increased global imbalances. The US will register record-high trade deficits (around USD1.3trn in 2022-2023), mirrored by a record-high trade surplus in China (USD760bn on average). Meanwhile the Eurozone will also see higher-than-average surplus of around USD330bn”, explains Françoise Huang, Senior Economist for Asia-Pacific at Euler Hermes.

And the winners are…

Euler Hermes estimates that the energy, electronics and machinery & equipment sectors should continue to outperform in 2022. But the main export winner globally in 2023 should be automotive, thanks to the backlog of work and lower capex in 2021. At the regional level, Asia-Pacific should continue to be the main export winner in the coming few years (over $3trn in export gains in 2021-2023).