COMMENT: Global shipping back to boom times

The world economy is firing on all cylinders, and that means that international trade is growing rapidly. The shipping lanes are busy, and that trend is likely to continue.

Globalisation is strengthening the linkage between economic growth and global shipping, as companies distribute their production processes around the world, move the components around prior to final assembly, and then ship the finished product around the world for final sale. The result is that every dollar of global GDP today requires more international trade than ever before.

Although the globalisation trend has received considerable attention in the past few years, it has been going on a long time. Global trade has been growing by 6-7% annually for the past 20 years, nearly double the average growth of the world economy. This means that trade is penetrating the global economy more deeply, and future growth is more dependent on it.

The last boom year for global international trade was 2000, when it grew by over 12%. That was followed by the bust of 2001, when a combination of slower world economic growth and security concerns caused trade growth to fall to zero. From there, the world economy began to recover, as did confidence in security, and trade increased by just over 3% in 2002 and 5% in 2003.

By all counts, trade is booming in 2004. The world economy is expected to post economic growth in excess of 4% this year, so trade growth will exceed 8%. World economic growth is expected to moderate a little in 2005, but international trade growth should still be in the 7-8% range.

That’s a lot of ships. This is especially true given that the resource-hungry manufacturing economies in Asia are importing such large quantities of raw materials bulk goods that take a lot of space for each dollar in value. One consequence has been higher shipping costs, since there is little excess shipping capacity to spare. The Baltic Dry Index is a commonly cited price index that describes the cost of shipping large quantities of commodities, and that index shows that shipping costs have quadrupled since their lows in late 2001. Indeed, prices reached a point in early 2004 that was nearly five times that in late 2001, but have since come back into the quadruple range. This pattern is very similar to that followed by commodity prices more generally.

This, combined with the global economic outlook, suggests that the world could use some more ships. Shipbuilders in Korea, Japan, China and throughout Europe all report strong orders. Capacity increases should bring shipping costs back down over time, but it is too early to say where costs will settle. In the meantime, add one more cost increase to companies that rely on international trade on top of higher prices for raw materials, insurance, security fees and so on.
The bottom line? The world economy is getting back to normal, but the costs of doing international trade are clearly higher than they were back in 2000. There is, in effect, some sand in the wheels of global commerce that will keep restraining things, just a little.

Stephen Poloz is the Senior Vice-President and Chief Economist , Export Development Canada. His column appears every Friday on ctl.ca