Baltic Dry Shipping Indicator
WELCOME to the world of Baltic Dry. It’s the new boom. And it’s already looking suspiciously like a new bubble. Baltic Dry is not, as the name might suggest, a new Swedish lager or exotic Latvian Martini. But it’s certainly an energiser, and it’s refreshing the parts other drinks have failed to reach.
Baltic Dry is an index of freight shipping. It has its origins in the City of London-based Baltic Exchange. The index, launched in 1967, has been little heard of outside of Lloyds List for most of its life, and effectively disappeared from view in the freight shipping crisis of the late 1970s. Here the market followed a predictable pattern, suffering the same fate as precious metal mining: not until the last diehard analyst had died, been fired, hospitalised or relocated to another desk did the sector burst back into life. The Baltic Dry has exploded into a near-vertical ascent and has been heading upwards ever since (as the graph shows). The index stood at 873 when China joined the WTO at the end of 2001. A year later it had climbed to 1,663. Last year it hit 4,608. The latest reading last week was 5,545 - a record high.
The great Baltic Index Boom is the third and latest of the mighty booms of our age. The first, spanning 1994 to 1997, was led by the Asian ‘Tiger’ economies - Singapore, Philippines, Malaysia, Taiwan and South Korea. It came to a juddering halt and bust with the LTCM collapse and financial confidence crisis of 1998. The second was the tech boom of the late 1990s that swept Wall Street and other leading stock markets to record highs. That, too, ended in spectacular bust.
The Baltic Dry Index is a leading indicator for economic growth and production. As such, it has perfectly captured the yawning hunger of China’s economy for commodities and raw materials that it is turning into finished manufactured product. It deals, not in abstractions or derivatives such as shares and bonds, but in real-world bulk carriers that are now crossing the oceans, their hulls filled with building materials, cement, grain, coal and iron, or their decks stacked high with massive containers of goods heading west.
The dramatic rise of this index begs two pressing questions. The first is how much of the global recovery in the past two years has been due to this ‘China Syndrome’. The second is how sustainable this latest boom is likely to prove.
The world economy is set to grow by 4.5% this year. This is the strongest pace of growth since 2000, some one percentage point higher than the average pace of global growth over the past 30 years, and on a par with the Asia-fuelled boom of the early and mid-1980s.
Two economies have been strikingly in the van of this advance: the US and China. Together they have contributed more than half of the growth that the world economy achieved last year. Using purchasing power parity currency weights, China may have contributed as much as a third of last year’s global growth, substantially more than the US.
By contrast, Japan and the Euro-zone contributed just over 10%. The problems of these two economies have been well documented. Japan is still struggling to come to terms with a 14-year collapse in asset prices. The Euro-zone is locked into a much more worrying and far-reaching demographic, geo-political and economic decline that will see the European and emerging market economies swap places in terms of size, importance, influence and dynamism over the next 30 years.
The dynamics of the US and Chinese economies are also markedly different. As George Magnus, global economist at UBS, well puts it, the US economy has been driven by policy activism to galvanise a cyclical recovery (record Federal government spending and tax cuts) while China is undergoing a burgeoning structural step-change.
‘It is possible that China’s economy hits a pothole (or something worse) over the next year’
However, America’s recovery rests on one, or rather two, shoogly pegs: a huge budget deficit and a huge trade deficit, both of them unsustainable. The hope is that federal government restraint on spending and a plunging dollar will bring about a rectification. But the doubts about America being able to sustain her recent blistering growth pace remain.
What of China? Even for sceptics of China data on GDP (up 9.8% in 2002, up 11.5% in 2003), some of the recent output numbers are stunning. And they serve as a much-needed antidote to the stinking thinking in Europe that cheap labour, naff-product China is to blame for all the Euro-zone’s ills. Car production is up 32.7% on the year. Air conditioning equipment is up 111%, computer production up 135%, steel output by 23% and washing machines by 42%.
All this devours raw materials, and in turn explains why commodity prices have been so strong. China’s share of global copper consumption has gone from 5% 10 years ago to more than 16% today. Indeed, it is now the world’s biggest consumer of copper, tin, zinc, platinum, steel and iron ore.
But China is also the cause of strong downward pressure on prices. Inflation in the Euro-zone is reckoned to be between 0.2% to 0.4% lower because of this China effect. On a global scale, the effect may be much larger, possibly as much as one percentage point.
This means that the real spending power of Western consumers has been enhanced by China: the money saved on buying cheap Chinese goods is spent in other areas of the economy, thus cushioning the unemployment effect of competition and the transfer of services such as call centres to China. Also not to be overlooked is the growth of China as an export market for the West. US exports to China rose more than 50% in the 12 months to November 2003.
As misleading as the myth of "unemployment made in China" is the myth of the low-skill, "dumb" Chinese economy - the same economy that had a successful manned space flight last year and that has just launched a "seasick free" cruise ship. European attitudes to China are not dissimilar to those held about Japan in the early 1960s. This was when President Charles De Gaulle famously dismissed the Japanese prime minister as little more than a transistor radio salesman. Such attitudes towards China will change in time. But it is extraordinary how many countries and regions in Europe are convinced of their ability to excel as "knowledge economies" - as if Asia and China in particular were dumb economies incapable of scientific and technological advance.
However, though the star of China is rising, it would be unrealistic to expect this to be an even, linear advance. It is possible that her economy will hit a pothole (or something worse) over the next year or so. Or the central bank could lose control of events, allowing inflation to take off and the stock market to form a massive bubble.
According to a study just out from the Centre for Economics and Business Research, the resulting downturn could be large enough to feed back and have a significant effect on GDP. The end result could be a revaluation of the Chinese currency, possibly by as much as 15%. This could mean not just the end of this benign, counter-inflationary pressure in the Western economies, but the arrival of a made-in-China recession.
More than is generally appreciated, it is the heartbeat of China’s economy that is now influencing the fortunes of the US, UK and other advanced economies - their growth rates and interest rates. For the moment, we are aglow with the energising effects of Baltic Dry. It is lifting our economies and bearing down on prices. Don’t expect such elixirs to flow freely forever.
This article:
scotlandonsunday.scotsman.com |
