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Better times for container shipping in 2020-2021

– Sluggish activity at ports around the Greater China region has been one of the most visible effects of the downturn in world trade in 2019. But port operators – as well as shipping lines, logistics providers, and others engaged in the sector – may now be able to look forward to gradually improving conditions in 2020 and beyond.

– In our view improving global business sentiment and a range of local factors should mean that world trade starts to recover from mid-2020 onwards. Our forecasts indicate global trade growth picking up to 2.5% in 2021 and 3% in 2022, driving a similar rate of growth in the container sector.

– The outlook is uncertain, though, especially with respect to trade policy. While the phase one trade deal offers hope of better relations ahead, the risk of further barriers being erected – especially between the US and China – remains.

– In our view, a re-escalation of trade stresses would trigger a slump in world trade and container throughput in the coming couple of years. Conversely, should trade tensions ease, the pace of trade and container growth through 2020-2021 could be more than doubled.

– However, even in an upside scenario the pace of recovery will be noticeably weaker than that seen after previous slowdowns. This is because the trade intensity of global growth is falling at a time when China is also restructuring its economy.

Figure 1: Container throughput growth could hit 5% in 2020, if trade war fears ease

Improving global trade outlook should drive global container throughput growth to around 2% in 2020 and 3% next year. Resolution of the trade war could accelerate growth to around 5% by late 2020.

Gradual improvement in global trade

Of course, one key factor behind a dismal year for world trade in 2019 has been the erection of ever-higher barriers to trade — principally between the US and China. The phase one deal signed on Jan. 15 offers hope that barriers won’t increase further this year, but the tariff reductions that they agreed to are relatively modest. Moreover, a risk remains that the deal proves to be only another temporary truce in the wider dispute.

Figure 2: Trade surveys suggest global trade may slow further in early 2020

Latest data offers a mix of reasons to be both hopeful and wary about world trade prospects in 2020. Surveys point to further contraction in trade volumes in early 2020, consistent with the view that the full impact of barriers erected in 2019 has yet to feed through. But underlying conditions look to be improving. Our global sentiment indicator finds overall business sentiment improving across the economies, while also seeing reasons for optimism on consumer confidence and evidence that inventories might be due for a rebound.

So after a weak Q1 (perhaps H1), the world economy and world trade can start a cyclical rebound later in 2020. The bounce will be modest but enough to push world GDP growth from 2.5% in 2020 to 2.8% in 2021 and 2.9% in 2022. This should support a pickup in total world trade growth to 2.5% in 2021 and 3% in 2022. This is rather slower than previous recoveries, reflecting the falling trade intensity of global growth. The historical correlation of global growth with shipping activity (Figure 2) suggests a similar rate of improvement for the sector.

Figure 3: Sentiment data stabilised in Q4, suggesting bottoming out in H1 2020

Stimulus and imports boost Chinese shipping

The outlook for world trade and global shipping are modest by historical standards, but regional and domestic factors should facilitate slightly faster growth in container activity in China and neighbouring economies.

In China, we recently upgraded our forecast for 2020 GDP growth by 0.3ppts (to 6%). This reflects a combination of the positive impacts of the phase one trade deal and easier macro policy in 2020 – specifically China’s shift from “structural deleveraging” to “keeping leverage largely stable.” China’s changing economic structure means its growth is becoming less import-intensive. But latest data suggest reviving import demand for consumer goods, heavy industries that have run down input inventories, and capital investment in sectors targeted in the government’s “Made in China 2025” industrial strategy.

Figure 4: Destocking among Chinese manufacturers is unlikely to run much further

In aggregate, therefore, our forecast is for China’s goods imports to strengthen by almost 3% in 2020 and 4.5% in the following couple of years. Export prospects are somewhat weaker, but nevertheless overall goods trade should pick up. That means faster container throughput at the country’s ports – six of which are the world’s busiest (including Shanghai, by some distance the global leader).

Figure 5: Recovery in China goods trade can support container growth at around 3%-4%

“Reshoring” fuels a pickup in Taiwan

Recent trade data is even more encouraging in Taiwan, where goods exports in US$ terms were 4% higher on the year in December. Indeed, exports to the US remained robust amid some emerging signs of a pickup in demand from China. Imports rose by 13.9% y/y in December, with capital goods imports up 66%.

One of the key factors in capital goods imports has been the “reshoring” of production by Taiwanese multinationals with bases in China to circumvent US tariffs. With tensions between US and China on technology issues unlikely to ease for some time, this process should persist into the coming couple of years. Government support for upgrading the sector to be 5G-ready will also underpin capital imports. Moreover, tentative evidence that the global semiconductor cycle has bottomed could support Taiwan’s goods exports in the year ahead.

Figure 6: Taiwan’s container traffic should push higher through 2020-2021

Overall, we forecast Taiwan’s goods exports to grow by around 2% per year in 2020-2021 and imports to grow slightly faster. This should enable container throughput at the country’s ports (including Kaohsiung, the world’s 14th busiest) to expand at a similar pace.

Figure 7: Hong Kong ports are set for another year of falling throughput

Another year of contraction in Hong Kong

However, the relatively positive run of trade data in the region has yet to be felt in Hong Kong. Inbound tourist arrivals were down more than 40% in the year to October, contributing to a 26% fall in import-intensive retail sales. On the outbound side, exports contracted 9% in the same period as disruptions to key transport hubs hurt business activity and production.

With the political unrest and protests in their seventh month and showing no sign of abating (even if protests have become somewhat calmer in recent weeks), we expect further contraction in the economy. More delays are likely for infrastructure projects, and business investment is also likely to contract again in 2020, further undermining imports of capital goods. Cash support to households might offer some help for goods imports, but the risks here are very much to the downside given households’ high debt burden and the rising unemployment rate.

Assuming a gradual resolution of the political situation, our forecast is for Hong Kong’s imports and exports to contract again in 2020, with imports leading a very gradual recovery in 2021. But the risks to this outlook look firmly tilted towards the downside.

Figure 8: Business views US-China trade deal as leading upside risk for world economy

Trade agreement could boost growth in 2020

What could substantially improve the outlook? A reduction in trade tensions, particularly those between the US and China, which have disrupted supply chains across the region. Our latest Global Scenarios Service simulates a scenario in which President Donald Trump takes a more clearly constructive tone towards China and unwinds recent tariff hikes. In response, investor sentiment around the world improves, supporting business confidence and ultimately boosting consumer incomes. Such a scenario is increasingly viewed as the most plausible upside risk for the world economy, according to our Global Risk Survey.

Against this backdrop, global growth could rise 0.7ppts faster than baseline in both 2020 and 2021, accelerating global trade by as much as 2ppts relative to the baseline. For the trade-intensive economies of China, Hong Kong, and Taiwan, the boost would be even greater, lifting goods trade (and potentially container throughput) by as much as 5ppts versus the baseline by 2021. However, the potential losses from an escalation of the trade dispute (also explored in more detail in our Global Scenarios Service) would likely be noticeably greater, at 6%-8% versus baseline.

Figure 9: Upside from an easing of trade tensions in 2020


Source: Oxford Economics

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