At its core, seaborne shipping demand is a combination of global economic activity and trade: the volume of goods and commodities bought and sold; how much is imported versus domestically sourced; and if imported, from how far away. Cargo demand roughly mirrors global GDP – whether as multiple or a fraction – based upon cargo trade intensity.
Seaborne trade is not static. The multiple of container shipping-volume-to-GDP growth went from 3.5 in the 1990s to over 2.0 in 2000–08, to about 1.1 in 2010, under 1.0 in 2015–16, and, according to consultancy Alphaliner, back to 1.7 in 2017.
But despite such fluctuations, trade routes are ‘sticky’. It takes time to move manufacturing plants and commodity production sites across the world. Supply chains become ingrained and display inertia. As a result, the most important bellwether for shipping demand comes back to GDP – and this indicator is ‘flashing green’ for 2018.
“Barring a shock, this expansion has staying power,” said IHS Markit chief economist Nariman Behravesh in his November 2017 economic outlook. He estimated that global GDP was set to expand by 3.2% in 2017, “the fastest rate in seven years”, then maintain that 3.2% growth pace in 2018, and pull back only slightly to 3.1% growth per year in 2019, 2020, and 2021.
The International Monetary Fund (IMF) is even more bullish. In its latest World Economic Outlook, published in October 2017, it forecast that global GDP would rise by 3.6% in 2017 and 3.7% this year. “The global upswing in economic activity is strengthening,” it said.
“The world’s key economies are growing at trend or a little above,” said Behravesh. “The US economy has shrugged off the effects of recent hurricanes. Europe continues to surprise on the upside. Japanese growth is solid, albeit slower than most. China’s growth is holding up, thanks to [its] stimulus. The emerging world is coming out of a two-year growth slump. This means that, excluding a shock, this expansion can continue for at least a couple more years.”
The caveat is that the shipping industry is exposed to one economy – China’s – more than any other. Both IHS Markit and the IMF predict that China’s GDP growth will decrease from 6.8% in 2017 to 6.5% this year. IHS Markit believes the country’s economy will then decelerate to 6.2% next year and 6.1% in 2020. The IMF forecasts Chinese GDP growth will slow to 5.8% by 2022.
According to Behravesh, “In the run-up to the Party Congress [in October 2017], economic growth was boosted by government stimulus. As economic stimulus is removed, growth will slow.”
In terms of risk to its global GDP forecast, IHS Markit cited potential low-risk/high-impact incidents such as war involving North Korea, but said, “The biggest threats are policy shocks. Chief among these are central actions, which in the past have tightened too much, either prematurely or too late.”
The IMF cited those same threats, but also warned of the risk of “a sharp growth slowdown in China, with adverse international repercussions”, as well as a global “shift towards protectionism”.
In addition to monitoring GDP, shipping interests should continue to keep a close watch on the protectionism threat. In 2017, there were widespread fears that US President Donald Trump would erect new trade barriers and negatively affect seaborne volumes. That did not happen, although concerns linger.
According to the IMF, “Although the chances of advanced economy policies turning inward appear to have diminished in the near term, pressures for increased protectionism have not disappeared and ought to be resisted.”
The positive relationship between global growth and shipping demand was spotlighted by BW Group chairman Andreas Sohmen-Pao during his address at the London International Shipping Week conference in September 2017.
“There is a lot to be optimistic about when it comes to the future of shipping,” he maintained. “By nature, humans have a built-in propensity for progress, to grow, and to trade. And now we have fantastic tools to help make that happen. There will be bumps along the way – such as Brexit and protectionism – but I think the genie is out of the bottle when it comes to progress.
“To take two extreme examples: Singapore had a GDP of USD2 billion in 1960 and now has a GDP of USD300 billion, and China had a GDP of USD300 billion in 1980 and it’s now USD11 trillion. There may be limits to how long that growth can go on in Singapore and China, but there are other countries that could eventually take up the mantle.
“China’s growth has happened at 10 times the speed of the UK industrial revolution and 200 times the scale, partly as a result of a larger population, but also because of technology and what the modern trading system can offer.
“With a GDP of USD11 trillion and at the current rate of growth of 7%, that’s USD800 billion a year of incremental growth. In every two-year period since 2008, the incremental growth of China’s GDP has been larger than the entire economy of India, and even at the lowest growth rate, in 2015, China’s economy created [the equivalent of the economy of] Greece every 16 weeks,” said Sohmen-Pao, who emphasised, “That kind of growth creates unbelievable shipping demand.”
Access the 2018 outlook page