Is the World Economy “Toast”?

 29 Jan 2016     Finance, Global Economy/Trade, Going Places, Politics

The current state of the shipping sector has led Bloomberg to state that the world economy is “toast”, yet is the world in such economic dire straits, and is the state of shipping a reflection of the global markets or vice versa?

Mark Gilbert states in his Bloomberg View column that: “In October 2008, as the repercussions of the financial crisis were starting to ripple through the global economy, I noticed a press release from Swedish truck maker Volvo saying that its European order book had fallen by more than 99% between the third quarters of 2007 and 2008.

“That prompted me to study various other real-world activity measures ranging from shipping to air freight, and to conclude that "the news is all bad and getting worse, fast." The same exercise today, I'm afraid to say, leads me to a similar conclusion about the growth outlook.”

The major issue in shipping in recent times has undoubtedly been overcapacity. This stemmed from the 2008 recession and is being ever exacerbated by carriers in the search to lower slot costs by consistently ordering bigger ships.

Ports, famously, are then struggling with capacity peaks and troughs emanating from larger ships by extension.

Yet while container shipping remains stuck in a cycle of overcapacity, the dry bulk markets have seen real decline, with the Baltic Dry Index hitting historic lows, faced with both overcapacity and even weaker demand than the container trade.

However, shipping is reactive by nature, and although it can shine a light into the state of global trade, it does not define it.

There are however two major culprits for the lack of global demand: the oil market and China’s stock market crash.

The weakening demand from China looks to be the inevitable backlash of the vast energy it brought into the world economy when it opened itself up to trade, and that it has now suffered a downturn global trade has been strongly affected, exhibiting a global reliance on China.

Oil has always had the power to be massively economically – and politically – influential.

The plunge in oil prices is usually good news for economies, however when prices stoop as low as they are currently, it can spread endemic fear in broader markets. On top of this, Saudi Arabia – the world’s second largest oil exporter behind Russia – continues to push out oil at full kilter creating (you guessed it) another form of overcapacity in the sector.  

So, container shipping, the dry bulk sector and the oil markets are all in their own way oversupplied, craving a boost in demand from the global consumer base.

It remains a turbulent, unpredictable position to be in, yet not quite as ominous as the toxicity in markets which reigned after the 2008 recession, and there are still measures that can be taken to combat overcapacity yet.

The problem lies in pulling together individual actors to work for the collective good, which in a dog-eat-dog market is very problematic.