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March 2015 BIMCO Shipping Market Overview and Outlook Report: Macro Economics

World Cement,

Global economy

Global economic activity is once again at the centre of attention as the shipping industry looks for guidance on the overall future demand. The good news is that International Monetary Fund (IMF) projections point towards increased Gross Domestic Product (GDP) growth with the US leading the way forward, while falling commodity prices negatively affect the potential growth for commodity exporters among the emerging and developing economies.

From a helicopter point of view, the US has outperformed expectations, while Japan has again fallen short of the same. The IMF has also revised in a negative direction the prospects of future growth in the euro area, China and Russia.

This affects shipping demand in multiple ways. For instance, lower commodity prices should, in theory, spur demand if the commodity is price elastic (a measurement for responsiveness of demand to price changes). Will this be the case for iron ore? Perhaps. Will the lower oil price improve the fundamental conditions in the tanker market in itself? Unlikely, as oil is considered to be overall inelastic. Will the slower GDP growth in emerging and developing markets result in a reduced import of containerised goods? It is likely it will.

Global economic growth accelerated to a five-month high in February. According to the J.P. Morgan composite indicator, the scope of optimism and economic expansion is strengthening for both the service and manufacturing industries. New orders came at faster rates, output expanded and the rate of employment expansion was still rising.

Among the movements below the radar was Brazil’s return to expansionary growth, while Japan slipped back into stagnation. Moreover, the Russian economy kept looking down the abyss with its all-industry output level declining at the sharpest rate since 2009. The reciprocal sanctions, the lower oil price and the tumbling value of the Russian rouble is certainly taking its toll on the Russian economy, affecting the economies of the Former Soviet Union (FSU) negatively too.


Real GDP increased by 2.4% in 2014, up from 2.2% in 2013. The increase in GDP was positively affected by higher private consumption expenditures (PCE) and negatively affected by decreasing federal government spending and falling net exports. Consumer spending, which accounts for around 70% of US economic activity, holds the key to the recovery. With PCE growing at 4.2% in 4Q, close to an eight-year high, that is not what is holding the US central bank – the Federal Reserve (Fed) – back from hiking interest rates, now that the quantitative easing has come to an end.

Chairperson of the Fed, Janet Yellen, said that: “if economic conditions continue to improve, as the [Federal Open Market] committee anticipates, the committee will begin, at some point, to consider a hike of interest rates”. Yellen is carefully continuing with the job of creating more normalised conditions for the economy with higher inflation and higher interest rates, while protecting the positive employment situation.

The US unemployment rate increased marginally in January to 5.7% of the labour force. At the most recent low point of the unemployment rate in 2006 – 2007, 4.4% of the labour force was without a job.


The Chinese central bank has just cut both its lending and saving rates for the second time in three months in a move to soften the slowdown of the economy. Although the economic growth in China remains high compared to the rest of the world, it continues to lose momentum. Last year the Chinese economy slowed to the lowest growth rate in 24 years, growing by 7.4%, even missing China’s own objective of 7.5%. In January, inflation was 0.8%, a five-year low and below the target of 1.0%.

Judging by the Purchasing Manufacturing Index (PMI) there is, however, still room for optimism. The Markit/HSBC (PMI) for February stood at a seven-month high at 50.7, up from 49.7 in January. While most conditions improved, employment declined somewhat. On an overall basis, 13.2 million jobs were created in China last year, according to the Chinese Prime Minister.

Chinese Prime Minister Li Keqiang announced that the growth target for 2015 is 7.0% as China will face greater difficulties than last year, as will its trading partners, and he hopes to direct China towards a slower more sustainable growth.

Across the sea from China, Japan’s production of goods rose for the seventh consecutive month in February. This contrasts somewhat with the negative news about lacking structural reforms and an economy slipping back into recession. It comes naturally on the back of the weaker yen and the positive effect this has on exports. Downside was also felt, as input cost rose.

While both industries are still expanding, the Indian service industry currently goes from strength to strength, whereas the manufacturing industry has lost a bit of momentum recently. In 4Q14, the overall economy grew by 7.5% y/y following an 8.2% y/y leap forward in 3Q. The new government seems to have started well if judged by the economic performance. Going forward, even more eyes will follow what is going on in India, as the growth momentum potentially shifts somewhat from China to India.


In Europe, small signs of recovery are appearing prior to the implementation of the €1 trillion stimulus programme constructed by the European Central Bank (ECB).

With a negative inflation of 0.6% in January, it was feared that consumer spending in the euro area would come to a halt, with consumers holding back purchases in hopes of costs going down. However, new statistics from Eurostat indicate this was not the case. Although consumer prices fell, it was still less than what was expected, and inflation for the euro area climbed from -0.6% to -0.3% in February. Retail sales grew by 1.1% from December 2014 to January 2015. A development like this is a very positive one for the container shipping industry as it provides impetus on the world’s trading lanes.

Job creation in Europe is assisting the recovery in gaining a foothold, and the unemployment rate for both the euro area and EU-28 has diminished since the second half of 2013. They now stand at 11.2% and 9.8% respectively, down from 12.1% and 11.0% at the peak.

The strengthening numbers from the euro area take place before a single euro has been spent from the €60 billion a month stimulus programme laid out by the ECB. It proves that clear and understandable central bank guidance is vital to turn the heat up on economic performance as the track back to stronger growth and vital job creation continues.


Finally, we can say that the ECB has started to use some of the “big guns” that have proven so successful in the US and UK, where expansionary monetary policies were taken on board rapidly. Conditions are different, the set-up too prolonged and the results may not be as convincing as seen elsewhere. So far, the euro area recovery has been lethargic and unsustainable since the outbreak of the crisis. Hopefully, this positive move will assist the region’s recovery.

The US is heading for an estimated GDP growth in 2015 of 3.6% by the IMF, an outstandingly strong performance that will assist many other economies in their recovery, as imports are likely to increase in the US.

The large oil-consuming countries and regions should also benefit from lower energy prices as it frees up money to spend elsewhere and lowers input cost for businesses.

Recent years have resulted in a slightly more balanced global economic development. Advanced economies have been growing at a stronger pace for the third year running in 2015, while the emerging and developing economies have been growing at a weaker pace over the same period of time.

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.

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