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Papering over the Cracks

As the global economy exits the three year pandemics, structural issues are becoming visible again.

President Biden and Speaker McCarthy have reached agreement over the federal budget which can no pass to the legislature for approval. A two year spending cap is the highlight, beginning 1st October. Rather than agree a new debt ceiling, the two sides have suspended the agreement of a new debt ceiling for two years, until after the next presidential election. As we wrote in an earlier Macro Macchiato, the tradition of kicking the can down the road comes from no politician wanting to be the one who pushes the government into default and the US into recessions.

Economists are suggesting that federal spending won’t be enough to prevent the US from falling into a recession later this year, but that the deal prevents the US from certainly falling into a recession in Q3. The deal involves the government spending less cash but issuing more treasury bills, a form of quantitative tightening which may slightly reduce the M2 money supply and therefore may be disinflationary. All the analysis I’ve read is full of words like “may”, “possibly”, “likely” and other modifiers. Sometimes the numbers are so big that it’s hard to make any kind of statement with certainty and as we all know in shipping, forecasting is fraught with danger, because you can only forecast based on what you know, and the future is unknown.

That doesn’t stop us from forecasting because people still need to plan for the future. The kind of freight market forecasts I’ve been producing since the late 1990s can tell us two things. Firstly – what will happen if nothing changes, except the things which we know will change, such as the age of the current fleet. Secondly, a forecast can give us insights into what we can manage and what we cannot manage. For instance, the board of directors of a shipping company can manage its own investments, but it cannot manage, e.g., Chinese demand for oil or President Putin’s appetite for bullying neighbouring nations.

Talking of China, the latest Purchasing Managers’ Index data came out his week, with the official number (which counts more state owned industries, as opposed to the Caixin number which counts more private industries) coming out at 48.8n in May compared to 49.2 in April. China’s recovery looked good in the first quarter this year with 4.5% GDP growth because of the rebound from lockdowns in 2022. But there has been a drag on demand growth from China’s main export customers in North America and in Europe, as the new export order index fell to 47.2 in May after 47.6 in April. The lack of orders is causing difficulties for China’s export led manufacturers, some of whom face long-term structural challenges, having become used to non-stop demand growth in the West from customers with disposable income. Higher mortgage costs and energy bills have slashed disposable income and with it discretionary spending.

The effects of these changes are visible in container shipping and in dry bulk shipping markets. In its latest quarterly report, Maersk has said that liners face a “radically changed business environment…it’s not like the macroeconomic backdrop points to a lot of growth.” US containerised imports are plunging, with west coast port throughput down 22% year on year in April to 0.8 Mn TEU, with the Port of Los Angeles said to be running at only 70% capacity. East coast ports reported a 20% fall in April throughput to 0.9 Mn TEU. The government debt agreement (or can kicking exercise, if you prefer) might give a mild boost to US economic sentiment, but retail sales have been flat now since May 2022 at around USD 600 Bn a month.

The lack of manufacturing orders is affecting demand within China for raw materials and for steel products. China’s iron ore imports were 90.44 Mn T in April, up 5% on the previous (covid-affected) year, while steel output was up by 5.6% to an estimated 2.5 Mn T a day. However April’s iron ore imports were lower than those in March (100.23 Mn T). Although some analysts blamed bad weather in Australia for lower April figures, the main iron ore loading ports in Australia reported little to no disruption. Meanwhile MySteel, the Chinese steel market consultancy, says that Chinese steel mills are maintaining an “on-demand procurement and a low-inventory strategy” for iron ore. A lack of inventory build has led to freight market drift in the Capesize bulker market. In turn that has led to a three-month flatlining Baltic Dry Index.

Meanwhile the Chinese domestic real estate market remains a ponzi scheme with a declining number of new shills as the population shrinks and the numbers of young people forming families, buying homes and cars and durable goods also shrinks. The government has decided to support real estate speculation this year in the hope that it will kick-start domestic consumer demand, but the results have yet to be seen, with the deputy premier saying back in February that he hoped the benefits would be visible in three to six months. But with 70 million fewer people under 20 than in the 20 to 39 age bracket, where are all the new consumers to come from?

The news out of the US and China this week remind us that the three year pandemic which is now drawing to a close not only came with its own economic costs (themselves with benefits for some container and bulker owners) but that it also drew a veil over a number of long-term structural problems in the global economy including rising government debts, slowing birth rates and consumer ennui … how many home computers, running shoes, sofas, cheap T shirts and smart accessories can we all own?

The pandemic also distracted politicians from the climate crisis and their much delayed response to the increasingly urgent need to transition from fossil fuels may yet have more painful consequences for shipping as well as for all of us – but that’s a matter for another blog – do please read more in my Ship.Energy posts. It’s free to register and read them, as well as to listen to my Ship.Energy podcasts available at the same website as well as via Spotify, Apple podcasts, Google podcasts, Audioboom,etc…

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