“A toxic mixture of overcapacity, weak demand and aggressive commercial pricing is threatening liner shipping industry profitability for the rest of 2015”, at least that is the latest forecast from Drewry Shipping Consultants for the container shipping market. Over capacity and aggressive pricing is normal for the shipping business however what appears to be the big problem is the state of demand. Maersk is forecasting the market to grow by 3 to 5% over the next couple of years, a figure that barely keeps up with global GDP growth. It would appear that the days of high single figure or even double digit container shipping volume growth are long-gone. In the last decade it was not uncommon for world trade to expand by twice that of the overall global GDP. Why should this be?
A new and rather long paper called The Global Trade Slowdown: A New Normal? has just been published by a group of economist led by Bernard Hoekman, an academic at the Centre for Economic Policy Research. The paper examines the underlying numbers around this question.
The report has collected a lot of data around the issue and attempts to come to some sort of conclusion about why and how global trade has changed over the past twenty or more years. As is common with economists, the group tend to disagree with each other. However the drift of the report is to assert that the growth in global trade has slowed over the past decade and this is in great part due to structural changes in the world’s economy rather than a symptom of the economic cycle.
What economist call ‘elasticity’ in trade growth; that is, the multiple of trade growth over underlying global GDP, has fallen. Trade/ income elasticity has dropped from a high of 2.5 times in the late 1990’s to less than 1.5 in 2013. More recent numbers suggest that it may have fallen to below 1 in period of 2014.
A number of reasons have been put forward to explain this. One is the shortage of ‘aggregate demand’ in the global economy since 2007 as Americans in particular reduced their role as consumer of last resort. However there are likely to be forces of a greater magnitude at work. One such force is the change in China, a major global production centre which drove the levels of global trade to new highs in the 1990’s, but whose changing and slowing economy is now dragging trade growth downwards as it reduces its appetite for commodities in particular. Similarly the effect of the integration of central European economies into both western European and global markets may have decelerated.
The report also suggests that firms have reached a limit to the level of outsourcing to lower cost locations possible and notes the overall shift towards services in the entire global economy.
In keeping with the nature of the problem the report is long and complex. However it does identify that the nature of underlying demand for global logistics services has changed and that those in the container shipping, air freight or other globally exposed sectors should not expect market conditions to simply return to the level and type seen prior to 2007.