Index of global shipping, Baltic Dry falls to a 25-year-low
Thursday, 09 February 2012 | 16:30
Back in 2008, the Baltic Dry index was an early warning sign of trouble ahead for the global economy. David Blanchflower was a big fan, and used to cite the Baltic Dry when he was trying, unsuccessfully, to persuade his fellow members of the Bank of England's monetary policy committee to cut interest rates in the months before the collapse of Lehman Brothers.
The reason Blanchflower and others used to study the Baltic Dry was because it measured dry freight costs, priced in dollars, as reported daily by brokers to London's Baltic Exchange. Prices for shipping coal, rice, wheat and other commodities were seen as a proxy for the strength of world trade and, by extension, of activity in the global economy. A falling Baltic Dry suggested that shipowners were cutting prices in the face of falling demand.
In recent days, the Baltic Dry has fallen to a 25-year-low prompting concern that history is about to repeat itself.
As both Lombard Street Research and Capital Economics said in separate notes on Tuesday, there have been some special factors at play. The boom in the Baltic Dry seen before the financial crash and recession was in large part the result of a shortage of ships, which pushed up the cost of carrying freight. There are now far more ships with greater capacity and, because it has taken time for the vessels to be built, the extra capacity has come on stream at a time when it is not really needed. A secondary, short-term factor, has been that the Chinese New Year fell early this year, depressing trade in Asia.
Even so, the 2.9% fall in German industrial production in December suggests that the Baltic Dry might have collapsed due to both increased supply of shipping and weak demand. Germany is the world's biggest exporter and the hefty slump in output at the tail end of 2011 coincided with the intensification of the crisis in the euro zone.
The Baltic Dry needs to be handled with a degree of caution, but it does provide information about trade flows that is both timely – the data is collected daily – and unaffected by speculation. It is worth keeping an eye on.
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