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The ship be sinking: a portent of economic doom

Monday, 13 February 2012 | 11:00
It is a portent of doom, a warning that a tempest approaches – forces more powerful than the post-credit-crunch squalls are whipping across the global economy.
The Baltic Dry Index (BDI), often touted as a leading indicator for the health of the global economy, has hit a 25-year low, some 95% lower than levels seen during its 2007 peak before the crisis.
Really it’s just measure of the cost of shipping major commodities by sea based on daily reports by shipbrokers to London’s Baltic Exchange, but, say economists, although it may have become distorted, do not ignore the warning signs.
‘We think it would be wrong to dismiss entirely the warning signals that the sinking of the Baltic index is sending about the underlying demand for commodities and the health of the world economy more generally,’ said Julian Jessop of Capital Economics.
Economists agree that one of the reasons for the apparent distortion in the index is China’s recent New Year’s holiday, which depressed trade in Asia. ‘But if the BDI fails to rebound soon, now that the peak of the holiday season has passed, it may well be telling us something important about the health of the global economy after all,’ says Jessop.
A further reason why the index hasn’t crept higher in line with the world economy since the worst that 2008 brought us is a change in the shipping industry. Dario Perkins of Lombard Street Research said: ‘Supply expansion in the shipping industry has structurally reduced the cost of moving freight by sea – there are now lots more ships with much greater capacity. This was a response to the previous boom and as is typical with investment involving long lags, much of this has come online just at the point where it is no longer needed.’
But other more reliable data point to a slowdown in world trade, Perkins added in a research note, including today’s German industrial production data.
Much of the slowdown is a result of weakness in the world's largest economy – Europe. ‘Given the euro area is likely to remain depressed through 2012, it seems likely global trade will remain subdued,’ Perkins says.
Jessop adds two further reasons not to dismiss the significance of the weakness of the index completely. ‘First, unlike the prices observed in commodity markets, the BDI is not significantly affected by speculation or swings in investor sentiment. Second, unlike conventional economic indicators such as industrial production or the PMIs, it is available daily rather than monthly. The upshot is that, while the BDI needs to be interpreted with care, it may still contain some useful information. We will be watching it carefully in the coming weeks.’
Source: City Wire
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