December 2014 BIMCO Shipping Market Overview and Outlook Report: Macro Economics

Global economy

The world economy will gradually improve over the next two years, according to the latest Economic Outlook report from the Organisation for Economic Co-operation and Development (OECD). It is estimated to grow by 3.3% this year and 3.8% in 2015 (IMF). We have heard this before – hopefully, this time it will prove to be true. However, the different stages of recovery between countries – in terms of growth, fiscal, and monetary policy – remain a risk factor.

The Euro Area is the weak spot in the global economy. The OECD implies that the Euro Area is not only a major risk to the rest of the world, but also very vulnerable to changes in the global economy. This highlights the interconnectedness across the world that has developed because of globalisation and increased world trade.

The fall in global oil prices, in itself an indication of both poor oil demand but also over-supply from producers, is very good news, as lower energy costs to the consumer should free up more money to spend on other goods. This phenomenon could actually prove to be a significant stimulant of growth, as winter in the northern hemisphere usually racks up the biggest energy cost in any given year.

US

The US economy continues on the road to full recovery, with yet another strong quarterly GDP growth figure. Data from the US Commerce Department shows that GDP grew by an annualised rate of 3.9%, upwardly revised from the flash-estimate of 3.5%. Consumer spending, which accounts for more than two-thirds of the economy, increased by an annualised rate of 2.2 % compared to the previously estimated 1.8%. This spending was one of the main factors for increased GDP growth, and is a vital component for a sustainable recovery.

The increase in consumer spending rests on the fact that the current job market is stronger than it has been for some time. At the end of November, jobless claims have been below 300 000 for ten weeks in a row, something not seen since the year 2000, indicating that new job creation is firm. Furthermore, falling oil prices have lowered the cost of gasoline to US$2.81 per gallon, the lowest it has been since November 2010.

The Federal Reserve (FED) has announced that it will end its bond buying strategy, as quantitative easing is no longer needed. Getting to this point is excellent news. Now the US (and global) economy needs to prove it can fly without the push from the FED.

Asia

In Japan, the economy has slipped into recession, marking another defeat for Prime Minister Shinzo Abe’s “Abenomics”. This follows in the wake of the April sales tax hike, which saw an increase from 5% to 8%. Because of the slip into recession, the next sales tax increase, (up to 10%) scheduled for October 2015, has now been postponed.

The OECD has the same poor growth forecast for Japan as it does for the Euro Area, setting its target at 0.8% for 2014, but emphasises that the weak Yen will benefit exports, and since corporate profits remain high, there is still hope for recovery.

In China, the Central Bank cut its one-year lending rate from 6% to 5.6% and its one-year deposit rate from 3% to 2.75%, the first cut since 2012. This is a result of a third quarter growth estimate, which at 7.3% lies dangerously close to 7.2% that is arguably the estimated minimum needed to keep unemployment stable. Behind the headline figures, the GDP growth rate may actually already be somewhat lower than the official data tells us.

EU

The Euro Area is expected to grow by 0.8% in 2014, but the risk of deflation is still very much a threat. The OECD estimates inflation to be 0.6% next year, far below the European Central Bank’s (ECB) target of 2.0%. The Euro Area “may have fallen into a stagnation trap” said the OECD and, once again, urged the ECB to begin a quantitative easing strategy.

At the end of November, Euro Area inflation slowed down to just 0.3% to match a five-year low, partly due to lower oil prices, but it keeps the heat on the ECB to stop this slide from continuing. The ECB has stated that it wants to raise inflation “as fast as possible” and they may just get a little bit of help from the oil price plunge.

The core problem for the ECB remains the German reluctance to start printing money. That strategy has worked well in the US and the UK and it is now the strategy in Japan too. Nothing the ECB does seems good enough for the financial market, which boosts the negative sentiment.

Outlook

Like all the other central banks of the world, the FED will now focus on its target for inflation, lying currently at 1.7%. Quantitative Easing did not create inflation, despite some economic theories suggesting otherwise. What would then bring about inflation on a global scale? Higher labour costs and bigger paychecks to the global workforce should. Nevertheless, as labour is abundant in so many places in the world, perhaps with the exception of the US, higher inflation is not waiting around the next corner. The challenge is to avoid deflation across the globe, as that would be toxic for the market-driven global economy.

The lack of confidence in the immediate future within the Euro Area also restrains hiring and that leaves unemployment at a continued high level – nowhere near the point where wages could rise due to labour market pressure.

France and Italy remain the key concerns in Europe, with demand for goods and services falling at a faster pace than last month. Meanwhile, in Germany they are finding it difficult to keep it together too, as a lack of new orders is cooling down economic activity.

In Asia, Prime Minister Abe may have a renewed mandate to keep his economic turnaround on course, despite being somewhat off track as regards to the third arrow (structural reforms), as well as sales tax hikes.

Indian GDP grew by 5.3% in 3Q, but the general sentiment is that the economy has now bottomed out and the Modi Government should be able to build on this to deliver on their election promises. Half a year on from now we will know whether this optimism had a more solid foundation than just the “Modi effect”.

In the meantime, the US and UK are pulling away in the right direction, with stronger and stronger GDP growth.

Will the plunging oil prices facilitate stronger economic performance? It surely holds the potential to do so, on a national level as well as on the individual shipping company level.

Written by Peter Sand, BIMCO Chief Shipping Analyst. This is an extract from the latest BIMCO Shipping Market Overview and Outlook Report. It has been adapted to meet World Cement’s house style.

More shipping market analysis can be found at www.bimco.org.

Read the article online at: https://www.worldcement.com/special-reports/12122014/december-2014-bimco-shipping-market-overview-and-outlook-report-macro-economics-3/