Trade flows are slowing as the global economy slows. At the same time, geopolitical risks are fragmenting trade relations. In the short term, increased counterparty risk due to the economic slowdown is expected to support prices, hence the growth of trade credit insurance. In the longer term, demand for trade credit insurance will increase as new supply chain contracts take shape and restructuring and shoring-up activities continue.
This year’s IMF and World Bank annual meetings come at a time when the world is increasingly in a state of geopolitical flux. Uncertainty prevails, particularly regarding the economic outlook, including trade. In these times of global change, in our view, trade credit insurance can ensure economic resilience. In its latest World Trade Outlook, the WTO cut its forecast for global merchandise trade growth in 2023 to 0.8% from 1.7% in April. This cut is not surprising given the current economic slowdown, which we expect to continue through 2024. Current geopolitical tensions add to the uncertainty. This leads to the fragmentation of existing trade relations, resulting in the signing of new regional, multilateral and bilateral trade agreements. In the longer term, we expect this will make supply chains, especially for intermediate goods, more complex and further increase the usefulness of trade credit insurance in keeping businesses and economies running.
Global real GDP growth is forecast to slow to 2.1% next year to 2.5% in 2023, a post-global financial crisis (beyond the contraction of the COVID-19 period) and below the historical trend (2013-2022).
In this environment, we expect global trade credit insurance premiums to continue to grow, largely on the basis of price increases. Global trade credit insurance premiums are estimated to reach $14.1 billion in 2023 (a 7.3% year-over-year increase to $13.3 billion in 2022) and $14.8 billion in 2024. This causes stagnation and homogeneity. In recessions and some advanced markets, counterparty risks remain elevated. The primary purpose of trade credit insurance is to protect the seller of a product against the risk that the buyer will not pay, usually due to the buyer’s insolvency or bankruptcy and long-term default. As with the global economic crises of the past two decades, increases in corporate default rates have led to higher trade credit insurance loss rates, which in turn require rate increases.
An economic slowdown will likely result in a reduction in trade flows, which, combined with the cost-of-living crisis many households will face from early 2022, could further weigh on living standards. Although incidents of social unrest have largely stabilized since last year, general dissatisfaction with the high cost of living will continue. And it will inspire another long-term movement in today’s world. One of the current geopolitical frictions and the progress of a new world order. Trade patterns have been reshaped along regional and political lines by signing new regional, multilateral and bilateral trade agreements with a view to safeguarding economic stability. At the same time, many advanced markets are attempting to “re-industrialize” their manufacturing sectors, including incentives such as subsidies and tax credits and, similarly, “re-” and “friendly” offshore manufacturing operations.
A new multipolar world where manufacturers relocate or offshore production in advanced markets, and sees the emergence of multiple and parallel supply chains with changes in suppliers and relocation of production facilities, will make trade in intermediate goods in particular more complex. Indeed, signs of trade fragmentation are emerging. For example, the share of intermediate goods in global trade, an indicator of global supply chain performance, fell to 48.5% in the first half of 2023, down from the previous three-year average of 51.0%. The WTO attributed the 0.9 percent cut to its 2023 trade growth forecast, mainly due to a 17% decline in iron and steel trade, a 16% decline in textiles and a 15% decline in fuels and minerals trade, which contributed to the overall decline. 5%. Percentage decline in trade value in current US dollar terms in the first half.
This increased complexity of supply chains will raise the profile of counterparty risk and the need for trade credit insurance protection. Also, new regional/bilateral agreements will involve a reallocation of trade resources, leading to trade creation and increasing demand for both trade credit and credit guarantee insurance. For example, the increase in export volumes generated by the Regional Comprehensive Economic Agreement is estimated to add about 4.4% ($1.29 billion) to credit and guarantee insurance premiums across the Asia Pacific region by 2030. Transition to a stable New World Order in the future.
Key Takeaways:
- Trade credit insurance is expected to grow even as global trade volume declines.
- Global trade credit insurance premiums will increase by around 6% to reach around $14.1 billion in 2023 and $14.8 billion in 2024.
- Growth is mostly based on premium rate increases.
- Against the backdrop of a global economic slowdown, counterparty risks are high.
- Previous crises have seen increases in trade credit insurance loss rates, increased corporate insolvencies, and required price increases.
- In the long run, the development of new trade agreements as the new world order takes shape will make supply chains more complex, especially for intermediate goods. This will increase the demand for trade credit insurance.
