Why the Baltic Dry Index won’t tell you the next recession
Lately some analysts and fund managers around the world are predicting a recession in the global economy or at least in the western countries, over the next two years. May be this is a result of the latest movement in the financial markets and the entry in the bear market. May be some of them are scared about the last hike of the interest rates by the Fed. May be the slowdown of the economy in China. But it may also be the free-fall of the most important index of the sea transportation cost around the world. In fact, the Baltic Dry Index, which tells you the cost of transport by ship, has plunged to its lowest level since the year it was released in 1985.
There is no doubt that the global economy is slowing down, but to talk about a recession in the next two years seems very pessimistic. First of all, the index is not a direct result of the demand for freight. The cost of transport depends also on the cost of oil and mainly on the vessels availability. As in the past 10 years we have seen a boom in the extra-large carriers production, the cost of transport couldn’t go up. For years, there has been an over-investment in the Panamax and Capesize carriers, since it has been a very profitable sector. Now that the offer of these extra-large ships has doubled and the commodity prices have slumped, shipowners have no choice than to lower prices.
To better have an idea of the global maritime transport it’s better to look to the Port industry statistics. There is no such a drop on the volume statistics. There is a slowdown on the value statistics, mainly because of the commodity prices’ plunge. There is more than a reason to look carefully on the slowdown of the western economies over the next two years, but the drop on the cost of sea shipping is not one.