According to a new report from SCOR, the COVID-19 pandemic caused a sudden quasi-global economic standstill and consequently led to a significant drop in global GDP, at levels comparable to those observed during the Great Depression of the 1930s.
The anticipation of such a massive drop in global GDP over a sustained period raised fears of a significant increase in overdue payments and claims for the Trade Credit Insurance (TCI) line of business.
However, over 18 months after the pandemic first began, SCOR notes that loss ratios for the TCI market have stayed at non-harmful levels, and in some cases have even remained below pre-pandemic crisis levels.
With countries being forced to restrict business activity and to close international borders, it created serious impacts on manufacturing and many other sectors of the economy.
The containment measures imposed by governments had severe impacts on both demand and supply, due to uncertainties triggered by negative employment and income prospects, a worldwide halt in production for several months, as well as other trends that were already gathering force before the pandemic.
Manufacturing in China and other countries in East and South-East Asia suffered the effects of the crisis sooner, namely in the first quarter of 2020, while the rest of the world registered production losses in the second and third quarters of that year.
SCOR’s report showed that gradual recovery in the manufacturing sector was observed in most countries soon thereafter, with restriction measures being phased out.
The report highlighted that household consumption of goods remained stable during 2020 thanks to government measures, even though global manufacturing output had been severely hit by the pandemic situation.
It is important to note, however, that manufacturing output was not affected to the same severe extent as during the Global Financial Crisis (GFC). SCOR believes that this is because demand was not as severely eroded during the pandemic as it was during the GFC.
SCOR noted that this good performance is due to a combination of two things in particular; a stable demand level, with a stable retail sales volume thanks to the unprecedented government support measures implemented in response to the pandemic. Followed by lower supply level, with a shortage of manufacturing capacity due to the containment measures imposed by governments.
This shortage was, nonetheless, significantly less severe than during the GFC. SCOR added that prior to COVID-19, retail sales volumes followed a similar pattern to GDP growth. However, during the Covid-19 crisis, goods consumption (at least for mature economies) remained much more stable while the GDP rate dropped.
This has led SCOR to believe that we can obtain more accurate estimates by using retail sales volume index scenarios (which also depend on the level of anticipated government support measures) as a refinement when analysing GDP to TCI Predictiveness.