Macro Economics: Shipping is faced with a positive, yet complex and changing macroeconomic landscape

Overview

The global macroeconomic scene has become more volatile, with prominent factors such as oil prices and global currencies causing a commotion.
Global economy: 
The global macroeconomic scene has become more volatile, with prominent factors such as oil prices and global currencies causing a commotion. This is resulting in large-scale distributional changes of wealth and income that will impact global trade patterns in the long run if these changes stick. Lower oil prices, for example, is not just a matter of lower fuel cost for the shipping industry, it also affects trade balance positives for oil importing nations and does the opposite for oil exporting nations.

The International Monetary Fund (IMF) held on to its January forecast of global economic growth after its April update was completed: 3.5% for 2015, is slightly up from 2014. Several national changes below the headline is also clear. The US is not growing as briskly as initially estimated and for Russia, the ‘abyss’ simply gets deeper by the day. Brazil is also in trouble as its challenges mount and its economic growth is now expected to contract by 1% in 2015.




US:
The US economy shrank by 0.7% in the first quarter of 2015. This followed a similar pattern to last year - one of the coldest winters in history, when the US economy was contracted by 2.9%.

A strong dollar and the disturbance in the US West Coast ports may have limited growth, alongside a long and tough winter period where consumer spending – the largest contributor to US GDP growth – slowed.

With somewhat weakening signals indicating that the US economy has not fully entered a steady growth scenario, the Federal Reserve Bank (FED) is in no hurry to hike interest rates. In spite of that, some suggested that the FED could raise the interest rates as soon as June. However, following their April meeting, the FED has kept interest rates close to zero, as it has been the case since late 2008, an indication that they are not prepared to raise them yet.

While GDP growth might have been poor in Q1, things are looking better on the job market. Reviewing the US Department of Labor’s “four-week moving average”, the number of Americans filing for unemployment benefits dipped as low as 266,500 in May, the lowest in 15 years. For 12 weeks in a row, the claims have remained below the 300,000 filing mark, a level associated with an improving job market.

Moreover, the US housing market, which remained more or less flat for the most of 2014, seem to be heading in the right direction. In April, single-family home sales reached a seasonally adjusted annual rate of 517,000 units. Almost 7% higher compared to the month before, and more than 26% higher compared to the same month the year before.

Asia:
The Japanese economy grew by 1.0% in Q1 2015 compared to the previous quarter. This strong growth rate was brought around by higher business spending. The data puts economic growth in Japan at the strongest level in two years. However, sluggish consumer spending and lower industrial output in April could limit the expansion in Q2 somewhat.

The Japanese Purchasing Managers Index (PMI) from Markit rose to a level of expansion in May climbing from 49.9 in April to 50.9. The sub-indices for production and orders both returned to growth levels. New export orders that should have come in from a depreciated Yen fails to impress, as growth stays weak. 

China’s rate of economic growth slowed further in the first quarter of 2015, increasing only by 7% compared to the year before. Such “slow” expansion has not been seen in China since the eruption of the financial crisis in 2009. In the past six months, China has cut interest rates three times in order to boost liquidity, in an attempt to counteract the growth slowdown the country is currently facing.

Manufacturing activity in China has been decreasing, and latest reports show that this trend continued in May. The PMI from HSBC/Markit stood at 49.2 in May, up from the twelve-month-low of 48.9 in April. Despite this increase being positive, the index remains below 50, meaning that activity is cooling down rather than expanding.

EU:
The economic growth in the euro area rose noticeable in the first quarter of 2015 as both France and Italy returned to positive growth after the last quarter of 2014 showed no change in GDP. GDP in the euro area went up by 0.4% compared to the previous quarter. France has benefited from an increase in consumer spending resulting in a growth of GDP of 0.6% compared to Q4 2014.



The economic outlook of the euro area is the best it has been since the financial crisis – according to European Central Bank (ECB) president Mario Draghi at a recent ECB event in Portugal. He specified that this by no means indicates that the challenges facing the euro area have passed but that the conditions are ideal for individual member countries to start working systematically with structural reform.

In its regular economic report, the World Bank expects economic expansion for all EU member countries this year. Something that has not been seen since before the financial crisis. The World Bank lists a weaker Euro, lower oil prices and the extensive quantitative easing by the ECB as the foundation for the growth. Especially exports from central and eastern European countries will benefit as the EU recovery gets going.

Outlook:
Exchange rate movements in the first five months of 2015 have been substantial. A stronger US dollar and a weakening of the euro and the yen have affected the underlying conditions for trade. In isolation, such movements should result in more imports into the US as consumers benefit from lower import prices. Imports should be coming from the euro area and Japan, as exporters in these nations appear to gain a competitive price advantage over domestic US producers. Both Japanese and European exports have gone up because of this shift.

These currency movements are results of expansionary monetary policies that is being carried out by the central banks in the respective nations/area.



The appreciation of the yuan against the US dollar has been put on hold. A clear sign of the awareness paid to the economic transition in the leadership in China, as they aim to protect their competitiveness in the export markets. We saw a similar action taken by China in 2009-2010 when the financial crisis started to rage.

Moving forward the complex changes to the Chinese economy is affecting shipping to a large extend. The shift away from infrastructure lowers demand for imported dry bulk commodities. 

As the economy changes towards a stronger private consumption domestically, the performance and importance of the manufacturing sector is getting smaller. However, it remains significant to the container shipping industry as the economic growth is less energy-intensive today and in the future will change the demand for oil as well as coal.

We should expect the macroeconomic challenges that face shipping to play a larger part even though it is difficult to predict exactly how it will impact shipping. As IMF Economic Counsellor, Oliver Blanchard puts it: “what strikes me… is the complexity of the forces shaping macroeconomic evolutions around the world and the resulting difficulty of distilling a simple bottom line”.


in Copenhagen, DK

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