Watch those ships as global trade growth seen slowing

Planes, trains, and automobiles carry us and a lot of other things, but ships carry more than 80 per cent of the goods traded globally. So, stay close to the ports if you want to understand the shifts in global trade patterns.

And by the looks of it maritime trade, which bounced back significantly in the post-Covid months, isgrowing at a slower pace as the war in Ukraine and economic uncertainty begin to bite the world.

According to UNCTAD, the UN trade body, international maritime trade showed an estimated growth of 3.2 per centand overall shipments of 11 billion tons in 2021, a rise of 7 percentage points compared to a decline of 3.8 per cent in 2020 when the world shut down due to fears over a global spread of the pandemic. Asia remained the world’s leading maritime cargo handling centre in 2021, accounting for a large chunk of exports and imports.

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In a recent report, UNCTAD projected global maritime trade growth to fall to 1.4per cent this year and then grow at an annual average of 2.1per cent between 2023 and 2027 -- a sharply slower rate than the previous three-decade average of 3.3 per cent. According to its latest update, global trade should hit a record $32 trillion for 2022, but a slowdown that began in the second half of the year is only expected to worsen in 2023.

Why is global trade losing the spring in its steps? The World Trade Organization (WTO) blames it on multiple shocks that weigh on the global economy. Fears of Covid continue to linger in China, the Ukraine war is making things difficult for Europe and rising prices is forcing Americans to slow their purchases. So, while WTO economists now predict global merchandise trade volumes to grow by 3.5per cent this year, they are cagey about 2023 predicting a much smaller increase.

To better understand 2023, we would want to return to 2021 when the world started re-opening and demand for consumer goods and e-commerce shot up across countries, much of it pent-up from months of closure. The abrupt rise in demand caused a supply-chain crisis, and that takes us back to the ships.

A surge in demand pushed container freight rates in 2021 five times higher than their pre-Covid levels and a longer turn-around time at congested ports – especially in the United States thanks to a paucity of port workers and truckers -- led to a sharp increase in consumer prices. Though container freight rates have fallen from their peak in early 2022, they remain high for energy cargo, according to UNCTAD.

And then came another economic disrupter. The Russian attack on Ukraine shook both the energy and the commodities markets hard. Mid-year, energy prices were up 78per cent year-on-year with natural gas up 250 per cent, according to WTO data. Crude oil prices were up by 36 per cent. Food prices galloped higher as wheat supplies from war-hit Ukraine stopped due to the closure of Black Sea ports. Dry bulk freight rates rose sharply even as the world was beginning to slowly recover from the pandemic’s earlier economic onslaught, as the war also affected the rail route between China and Europe.

In 2021, the railway was a saviour for shippers who had to look for alternatives to move cargo as ports became congested and airlines still weren’t flying at their pre-Covid capacity. According to UNCTAD data, the demand on the China-Europe railway rose 30 per cent to nearly 1.5 million twenty-foot containers. The war also impeded the use of the trans-Siberian route, which was used by China, South Korea and Japan to move goods into Europe.

It was a double whammy of the sorts never experienced before. The world was as unprepared for the trade stoppage as it was for its recovery. And if current underlying assumptions – a global economic slowdown, continuing higher inflation rates, currency shocks, and higher food, and energy prices among others – hold then 2023 could possibly turn out to be worse than anticipated.

For example, import demand is likely to be subdued in Europe as high energy prices due to the war in Ukraine and Russia’s decision to shut down gas supplies will impact household spend even as manufacturing costs rise. High inflation is eating into the American dream of buying homes and cars.

China, still very much the world’s factory, is struggling due to the earlier difficult Covid closures and now sudden uncertain re-opening, as production gets hit at a time when exports are slowing. Exports from China were lower in October 2022, the first decline in shipments since May 2020, thanks to poor overseas demand. The situation might not change very much very fast.

The IMF expects one-third of the global gross domestic product (GDP) to enter contraction. When the global economy slows, trade slows too. The US – the world’s biggest economy -- which expanded by 5.6 per cent in 2021, is expected to grow by less than 1 per cent next year. High inflation and rising interest rates are choking demand and growth.

China, the other big elephant in the room, is expected to grow a tad stronger next year, but these are still early days of post-Covid reopening and a lot will depend on whether China returns to lockdowns if things go out of hand. India – a bright spot in an otherwise gloomy world -- is also expected to slow, as are Gulf economies, which benefited from high oil and gas prices following the pandemic.

With so much happening, the big question on everybody’s mind is whether trade will only slow or end up shrinking if current underlying assumptions give way to surprises, even shocks. All that is bad news for trade and the ships that sail the oceans. So, watch those ships closely!

(Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.)

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