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Downgrades and Ukraine

China’s breakneck pace of development has to end eventually – we have all understood that for some time. But even if it does, will trade slow with it? That depends on demand outside China, in its customer nations, particularly in the ASEAN region and in the OECD.

The Asian Development Bank says that it “is revising its economic growth outlook for developing Asia after renewed outbreaks of COVID-19 led to slower growth in the third quarter.” In its last bulletin, in December 2021, revised down by 0.1% its view of Asian GDP to 7.0% in 2021 and 5.3% in 2022. Inflation is projected at 2.1% in 2021 and 2.7% in 2022. Covid infections are running at much lower rates in Asia than in Europe or the US. It may be that an Omicron surge has yet to happen – only time will tell.

On 17th January, Goldman Sachs, the behemoth of Wall St, cut its USD GDP forecast for 2020 from 3.8% to 3.4%, based on its expectations for lower fiscal stimuli and the ongoing spread of the Omicron variant especially in the less-well vaccinated South. Goldman Sachs expects 2021 GDP to have grown by between 5% and 6%, so its 2022 forecast suggests a significant slowdown, as well as demonstrating the V-shaped rebound in 2021 from Covid-infected 2020.

The US Federal Reserve has meanwhile said that it will react to rising inflation by raising interest rates. But if growth is tailing off naturally, perhaps interest rates won’t need to rise quickly at least. Meanwhile, investors like "real assets" during times of inflation. This could support vessel values even if freight markets are not as strong this year as last year.

The EU publishes its GDP figures for 2021 only in February. But Italy performed well last year, under the technocratic guidance of premier Mario Draghi, erstwhile head of the European Central Bank. GDP growth of 6.3% for full year 2021 is the consensus, which would represent not just a rebound from 2020 but a ‘solid’ performance according to ING Bank analyst Paolo Pizzoli. Europe is not a homogenous economic bloc but if Italy has performed averagely as it often does, then the data for last year may support more positive predictions for this year.

The greatest risk to growth in the EU this year comes from the stand-off with Russia over its ambitions in the Ukraine. Mr Putin has engineered his own Cuban missile crisis and, one supposes, hopes for a similar outcome – to force the opponent to withdraw missiles from his near abroad. He may be serious about wanting guarantees that Ukraine will never join NATO. It is an ugly situation which could easily disrupt trade and investment across Eastern Europe. It could also drive up energy prices across the EU while it is already causing rifts in Germany’s new coalition government. With no common foreign policy, the EU has no consistent approach to Russia, which is just how Moscow likes it.

More widely, as energy prices are rising already, a risk premium for oil based on conflict in the Black Sea and Eastern Europe could drive oil prices above USD 100 per barrel - there are even bold forecasts circulating of USD 150 per barrel. This would be bad news for the global economy. Inflation would be driven upwards, growth would slow. Oil demand's post-Covid recovery would stall. The tanker markets would be the most affected, and it is already in intensive care.

In dollar terms, the Baltic’s VLCC time charter average remains determinedly in negative territory at an average of USD -12,800 in January compared to USD -8,638 in December. As usual, brokers calculate higher numbers. Clarksons Platou suggests VLCC eco ship rates are below USD 10,000 per day – about opex levels, while Howe Robinson suggests non eco VLCCs are losing USD 2,200 per day on the Mid-East to S Korea run. Tanker specialists Poten and Partners rate a VLCC Mid East to Far East at USD -1,900 per day in mid-January compared to an annual average of USD -1,000 for 2021.

The Baltic Clean Tanker Index peaked at 856 points on 15th December. It opened in January at 675 points and downhill slalomed to 558 points on 20th January, giving up 35 per cent in a month. Still, that’s better than the annual average of 518 points for 2021. Tanker shareholders are already looking at another quarter of losses. The last thing they need is an oil price spike driven by war in Europe. In that, they have something in common with everybody. Let's hope that diplomacy prevails.

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