• Trade growth has swung back in favour of the UK and Europe: reopenings are driving better trade performance but Brexit is still weighing on UK imports from the European Union.
• Asia has seen a slowdown, driven by the Delta variant: the latest data shows a partial recovery in exports, but broadly slower growth has exacerbated supply chain and price pressures.
• Like most pandemic-driven inflation elsewhere, we expect price rises to be transitory: shipping costs, margin and supply pressure should recede as reopenings continue.

Regional trade performance was highly varied overall, but the biggest trade growth at the end of Q2 was seen in the UK and Euro area, driven primarily by reopenings.

Exports from UK increased by almost 8% month-on-month in May, witnessing a rebound from their Brexit-induced lows at the beginning of the year, and exports to the European Union (EU) rose 9% during the same period. Exports outside the EU also continue to grow at an encouraging pace (6.4% in May).

But despite the positive momentum driven by reopening, the effects of Brexit continue to weigh on the UK. Imports from EU remain low in comparison to the levels seen at the end of 2020 and are 12% lower than the pre-pandemic levels. With only one new post-Brexit free trade deal in hand (with Australia, agreed in June 2021) and tensions rising with the EU over the Northern Ireland Protocol, the longer-term outlook still remains unclear.

Recently, we’ve started to see a broad reversal in global trade growth patterns. At the end of 2019, a few months before the world cascaded from East to West into lockdown, many countries saw strong trade growth on the back of an improving global growth outlook. After the pandemic hit, Asian economies that were first to impose restrictions were also first to emerge from their grip while Europe and the Americas lagged behind.

Now, new social restrictions put in place to contain the spread of the Delta variant in Asia is weighing on trade in the region, exacerbating supply chain pressures and driving up the cost of moving goods from East to West. As the chart below shows, the largest trade performance declines were concentrated in Emerging Asia, China, and Japan (though partial data from June does show a modest recovery in exports from Asia).

Are shipping price rises here to stay – and for how long? We think costs will start to fall as more economies reopen through the second half of this year, and we do not expect rising transportation costs to be a longer-term driver for inflation or margin pressure.

These rising costs, coupled with supply bottlenecks, have pushed up raw materials costs significantly but we have seen limited pass through to consumer sectors. In China for example, the producer price index (PPI) – which measures input costs for producers – has advanced to a decade-high of 9% but consumer price inflation (CPI) remains subdued at around 1% and well below the government target (3%). In the UK, inflation topped 2.4% in June, and in the US, the core CPI measure has picked up in recent months, but in both cases the drivers are reopening-related service components and are expected to be transitory.

Going forward, as supply challenges recede, further increases in trade growth in the second half of 2021 could be supported by the high backlogs that exporters will need to fulfil, as well as inventory build-up. However, the main risk to be mindful of is that there could be a sizeable slowdown in the pace of recovery as compared to last year or so.

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