Macro Economics - Global growth on its way back, but dampened by high unemployment

Overview

As we are about to call it a day on 2013, we can now look back at a year that we are happy to say good-bye to, as it disappointed us. One year ago, 2013 was proclaimed to be a year with stronger growth than the one we had just left. Today, we are predicting the same thing in 2014, which is estimated to be just as good at 2013 was supposed to be.

Global economy:
As we are about to call it a day on 2013, we can now look back at a year that we are happy to say good-bye to, as it disappointed us. One year ago, 2013 was proclaimed to be a year with stronger growth than the one we had just left. Today, we are predicting the same thing in 2014, which is estimated to be just as good at 2013 was supposed to be.

However, each new outlook tends to be a de-rating of the global macroeconomic engine. The latest update is different, but the de-rating comes earlier this year and in an especially hard way in the emerging markets and for Europe. IMF and OECD have both set their targets at 3.6% for global GDP growth for the coming year. In 2013, global GDP growth looks as if it will settle for 2.8%

Amongst the risks that still pose a threat to the growth scenario are many familiar faces: the European banking system, the recurring discussions about finances in the US Congress, as well as negative spillovers from a slowdown in emerging markets.

US:
The US will continue its expansionary monetary policy, which brings around stronger growth that will benefit shipping demand too. According to the incoming Chairman of the Federal Reserve, Janet Yellen: “A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases”. In other words, the job that started in November 2008 is not done yet, as the US economy is performing below its potential.

The creation of more jobs by keeping interest rates close to zero while watching closely the inflation thermometer as the monetary base expands is not an easy task. But for now, the plan looks as if it is working.

The US economy grew by 3.6% in the third quarter. As a headline figure it was satisfactory, but on closer inspection, it’s somewhat disappointing. The personal spending of US consumers fell below that of Q2 at 1.4%. The same happened for businesses spending, while stockpiling was the most positive growth contributor, adding 0.8% to the headline figure. As higher income arrives at a very slow pace, consumers cannot unleash demand to the desired level. Our expectation for Q4 is lower growth due to the government shutdown and debt ceiling row that happened in October.

 

Asia:
In China, Premier Li Keqiang has stated that his administration wishes to stabilize economic growth to ensure a stable job market. The ruling communist party also wants to prevent any social unrest that may jeopardise development plans. Li Keqiang continued to say that China must grow at 7.2% annually to create the necessary 10 million jobs a year. These numbers would, moreover, cap urban unemployment at around 4%.

The Japanese path back to improved economic conditions is paved with hurdles which must be overcome. So far, the initial impact of new monetary, fiscal and structural policies has produced strong growth in exports, rising consumer spending, elevated inflation expectations and a rebound in business investment. Going forward, wide-reaching structural reforms are needed to boost growth and confidence in order to make the so-called “three arrow” strategy work; the other two arrows in the strategy being an aggressive monetary easing and an expansive fiscal policy plan.

As part of the deal with Iran on its nuclear programme, the US and EU have suspended some sanctions, e.g. on petrochemical exports and sanctions on insurance and transportation services associated with both the export of crude oil and petrochemicals. This is likely to ease business conditions for the parties involved in importing Iranian oil, primarily located in Asia. Yet this accord is unlikely to bring about much more volume to be shipped, as the level of crude oil exports remains at current depressed level, but it could have a small positive impact through lower oil prices.

EU:
The Eurozone keeps crawling away from the recession in slow motion. The pace of the recovery signals only modest optimism for higher shipping demand.

In line with the expectations we expressed in the October edition of BIMCO Shipping Market Overview & Outlook, economic growth for Q3 in the Euro area came in below Q2 (0.3%) but still in positive territory at 0.1%. As is the case for the US, unemployment remains a major issue to solve for Europe in order to develop self-sustaining economic growth. The Euro area unemployment rate currently stands at 12.1%, whereas the youth unemployment rate is at 24.4%. The ghost of the debt crisis still haunts us, and supplements the issues at hand which have to be dealt with. On 13 November, the ECB took action against the growing difficulties of maintaining the positive momentum by cutting interest rates to a record low level, now at 0.25%.

Even though the slower growth was anticipated, the figures for Q3 were particularly disappointing from France (-0.1%), but also Germany (0.3%) showed weakening strength. Looking ahead, 2014 remains on track to build on the structural reforms and fiscal consolidation that has been carried out in Europe over the past years.

Outlook:
The basket of economic news from the US and Europe was supplemented by lukewarm GDP data from Japan coming at half the size of Q2 growth level, but strong enough at 0.5% to remain optimistic about “Abenomics” being on track, despite the caveats. Overall, the development is positive and expected to bring higher demand for seaborne transportation worldwide.

In the US, the next deadline for another administrative shutdown is 15 January 2014, when the temporary funding to keep government open expires. Nevertheless, the “real” deadline may be found in February, when the debt ceiling is to be reached again, offsetting the need for a new lifting of the ceiling. A lot of political talk is expected, with only a few steps likely to be taken, in addition to a further undermining of consumer confidence that hampers GDP growth.

In their Global Economic Outlook, the OECD disclosed evidence that world trade, as a percentage of global GDP, is no longer following the same progressive trend of the past. In the 1990s, world trade stood at 15% of GDP, in 1998 at 20% and in 2006 at 25%. However, since the dip in 2009, world trade has recovered to reach 26% in 2011 but has stayed at that level since then, breaking out of the progressive pre-crisis trend. Despite the fact that world trade keeps growing in value and volume, this potential new trend is bad news for shipping, as it could dampen growth in shipping demand more long term. Considering world trade used to grow at a progressive rate to GDP, the trend of “just growing” at a linear rate to GDP in future is disturbing.

in Copenhagen, DK

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