Summer 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.