Leading Indicator of Global Production and Trade.
PETER G. HALL
and Chief Economist
has arrived in the Northern hemisphere, and those expecting a quieter
pace may get more than they bargained for. As we enter the season, a
growing number of key international indicators are on the wane. One of
the more dramatic is the Baltic Dry Index (BDI), an important barometer
of global trade activity. In recent days, the Index has seen an alarming
freefall. What’s going on?
Increased global trade has drawn growing attention to this particular
Index over the past decade. The BDI tracks the prices of shipping raw
materials that are key to global industrial production around the world,
in vessels of varying size. As movements of these materials indicate
anticipated production levels, the Index has increasingly proven itself
as a leading indicator of global production and trade.
The steepness of the current tumble is unusual. For a 15-day period
ending in mid-June, the Index lost one-third of its value. Although the
post-recession period has seen the Index stage two other notable
declines, one has to go back to the onset of the recent recession to see
a drop this dramatic. The turn of events is unfortunate, as it
interrupted what looked like a decent, sustained run of growth.
For most of the last two decades, BDI movements were fairly humdrum.
That changed in late 2003, when constraints in global shipping capacity
sent prices sharply higher. Calm returned, but prices spiked again a
year later as capacity constraints re-emerged. The Index settled down
again for about a year, but took off to unthinkable heights in the
2007-08 period as late-cycle global growth sent commodity prices skyward
and tested the limits of global trade capacity on a number of fronts.
Recession felled the Index in late 2008. After a small rebound, it
flattened out – until now.
In the current cycle, the BDI gave a good early indication of what was
in store for trade activity. The Index began to drop sharply in mid-June
of 2008. Real global trade activity continued to chug along until
November. It also provided a decent lead on the drop in world trade
activity in 2001. Prior to that, there were also signals in 1988 and
1990 that something was amiss – and both years were top-of-cycle
moments when the world economy was on the verge of correction.
As of March, real world trade activity continued to increase at a strong
pace. However, since then the statistics have not been as rosy. Troubles
in the Eurozone have weakened confidence, and together with a sharp drop
in the Euro, have weighed down regional demand for the world’s goods
and services. After an initial rebound, US demand remains uncertain.
Early indications of world trade activity are also showing weakness.
Singapore, a global trade bellwether, showed a remarkable rebound
earlier this year, but since then, its trade growth has stalled.
Put together, these developments suggest that the inspiring initial
rebound in global trade is giving way to an interim period of weakness.
It should come as no surprise that the initial kick in trade growth
coincided with the injection of significant public stimulus all over the
world. That stimulus is now maturing, revealing the continued underlying
weakness of the world economy.
The bottom line? The recent tumble in the Baltic Dry Index suggests
weaker global trade performance as the year wears on. It also suggests
that key commodity prices will be in for a rough ride.
views expressed here are those of the author, and not necessarily of
Export Development Canada.