Prospects of a V-shaped export recovery

The $3.9 billion export in July brought a glimmer of hope about a V-shaped recovery. A positive 0.6 percent growth relative to exports in July last year came after nearly eleven months of sustained year-on-year decline with the sole exception of December 2019. Export growth was back in the negative territory in January and February before all hell broke loose with the spread of Covid-19. The twelve monthly moving average decline of 1.6 percent in February plummeted to 17.1 percent in May followed by a slight stemming of the downturn in June to 16.9 percent for FY20. Who would have anticipated this when the year started with 8.6 percent growth in exports in July 2019?

The increase in exports in July is significant in such a recessionary context. The increase was about $23 million higher than the level of exports in July 2019. Knitwear, jute goods, home textiles, agricultural products and pharmaceuticals led the increase while woven garments, leather, and other manufactured goods such as plastic and leather-based products dragged it down. Does this signal the bottom is past?

Whether the bottom is past depends on factors contributing to the export recovery. There was a backlog clearing effect as suspended orders were restored. This will peter out. The impact of deepening recession in major export markets such as Europe and the US was cushioned by the relatively low-income sensitivity of demand for basic items that Bangladesh exports. This will act like a bottom holder if the main markets have bottomed out. Exports to European markets appear to have played a key role. Retail sales in the eurozone recovered significantly since May to near pre-lockdown levels as governments spent billions to limit the damage to employment. Bangladeshi manufacturers also utilized the opportunities for exporting personal protection equipment, masks, hand sanitizers and so on created by the virus. Markets for these new products internationally are far from saturated but the race is on with competing manufacturers in Germany, Netherlands, US, China, Singapore, Vietnam, and India.

Bangladesh's export recovery prospects this year are largely contingent on developments in existing export markets. Developments in Europe and US will be key. The European Commission projected 6.25 percent growth in 2021 after 7.5 percent contraction in 2020 in the EU assuming progressive easing of the containment measures. Europe have extended short term work support schemes through the rest of 2020. This will help sustain their recovery in consumer spending even if recession continues. The US GDP declined 32.9 percent in April-June, surpassing the previous worst ever record in the first quarter of 1958, when the economy shrank by 10 percent. Unemployment rate in the US declined from 14.7 percent in April to 10.2 percent in July, still more than twice the 3.5 percent from February. The virus is playing havoc in several US states, the stimulus package boosting household disposable incomes has ended and its renewal stuck in a political impasse. The US Federal Reserve Bank projected in early June that GDP will contract by 6.5 percent in 2020 and rebound to a 5 percent growth in 2021.

Apparel export orders are reportedly gaining strength but at relatively lower prices. Demand is weak while competition domestically and internationally is stiff. The orders received are not expected to utilize more than 60 to 70 percent of capacity in the next six months, according to various media reports. These suggest RMG export growth most likely bottomed out in May-June. Aided by a few non-RMG big items in engineering, agricultural, and pharmaceutical products plus harnessing the virus induced opportunities, the V-shaped recovery may indeed be in sight. Allegation of unethical practices in the supply of some new virus-based exports such as masks need to be addressed with outmost urgency to protect the country's image and avoid long-term damage.

A second dip cannot be ruled out. Sustainability of the V-shaped recovery depends foremost on the state of health in the global and domestic economy. The virus, both domestically and internationally, will have a big say in determining the trajectory of exports moving forward. The arrival of a reasonably safe, efficacious, and accessible vaccine in the first quarter of 2021 will be huge confidence booster even if it takes a while to get herd immunity globally through vaccination. Otherwise, recovery will depend on how much global mixing resumes and what kind of preventions are adopted locally and globally. Recent models and evidence from successful lockdowns suggest that behavioral changes can reduce the spread of Covid-19 if over 75-80 percent of people wear masks, wash hand, distance physically, avoid clustered indoor gatherings and shun superspreading behaviors. One can only hope good public health principles will trump misguided noncompliance inspired by views from the "alternate universe" in shaping public policy and behavior. However, success on this front is bound to limit the economic rebound.

Recovery will also depend on how the global multilateral trading system morphs. The Covid-19 shock has increased the already uncertain trade policy environment with deteriorating trade relations between the US and China. Policy makers and companies are reassessing the viability of reliance on global value chains, which now account for almost 50 percent of global trade, according to the World Development Report 2020. The increase in perceived premium on resilience could result in companies increasing the geographical diversification of supply chains or re-shoring production. Chances are companies may change their supply chains, but not radically. They will still buy products and components from the most efficient sources. This may, however, change if the virulence of the pandemic lasts longer and if the ongoing trade disputes spread in ways that undermine the predictability of the international trading arrangement and the certainty regarding the rules of the game.

Restructuring of global supply chains may open opportunities for Bangladesh to attract export oriented FDIs. Several American and European manufacturers intend to relocate out of China to have diverse geographical locations. Japan is reportedly offering financial support to its industries to relocate. This is a great opportunity for Bangladesh to attract the foreign relocators through policy measures focused on investments in infrastructure and incentive measures counteracting the endemic problems of operating here.

The government should ease out the restrictions on trade, uniformly support exporters to expand and diversify by correcting the real exchange rate overvaluation and pursue macroeconomic policy to buffer the economy from the economic vagaries resulting from the pandemic. Together with virus mitigating behavioral and policy changes, these are our best bet to sustain the recent revival of exports.