The world’s freight transportation systems are one of the best early indicators as to how our respective economies are going to perform. If our shipping lines, railways and trucking companies are busy it’s an indication that consumer demand is brisk and the manufacturing sector is humming; building consumer goods and products either for immediate sale or inventory.

On the ocean freight side of the ledger the Baltic Dry Index is one of the most reliable metering devices and, lately, amid all the talk of economic recovery, the readings have been dismal.

Why?
The answer according to Peter Hall, Chief Economist with Export Development Canada, is that the taps on government spending that was needed to help offset the impact of the global recession are losing their power to drive the economy and the BDI is responding appropriately.

“The steepness of the current tumble is unusual,” said Hall. “For a 15-day period ending in mid-June, the Index lost one-third of its value. Although the post-recession period has seen the Index stage two other notable declines, one has to go back to the onset of the recent recession to see a drop this dramatic.

“The turn of events is unfortunate, as it interrupted what looked like a decent, sustained run of growth.


“The Index began to drop sharply in mid-June of 2008. Real global trade activity continued to chug along until November. It also provided a decent lead on the drop in world trade activity in 2001. Prior to that, there were also signals in 1988 and 1990 that something was amiss – and both years were top-of-cycle moments when the world economy was on the verge of correction,” he said. 

Hall attributes the recent plunge to problems in the Eurozone that have weakened confidence and, together with a sharp drop in the Euro, have weighed down regional demand for the world’s goods and services.

“After an initial rebound, US demand remains uncertain,” he said. “Early indications of world trade activity are also showing weakness.

“Singapore, a global trade bellwether, showed a remarkable rebound earlier this year, but since then, its trade growth has stalled,” he said. 

Hall said these factors have meant that the initial rebound in trade worldwide is now starting to sag as government stimulus programs are becoming normalized and losing their initial impact in sparking the economies of countries worldwide.

“These developments suggest that the inspiring initial rebound in global trade is giving way to an interim period of weakness. It should come as no surprise that the initial kick in trade growth coincided with the injection of significant public stimulus all over the world. That stimulus is now maturing, revealing the continued underlying weakness of the world economy,” he said.

And what does he see in his crystal ball these days? First, weaker trade performance for at least the remainder of this year and, secondly, a rocky ride for most key commodity prices.

However, while other countries, such as Canada and the U.S. may see their fragile economies begin to slip back into a recession if Hall’s predictions are accurate, China, the world’s third largest economy next to the U.S. and Japan, seems to be on a roll due to its $586 billion stimulus package and over $1 trillion in new lending.

According to Keith Fitz-Gerald, Editor of the New China Trader, consumer spending is taking off in China and 80 percent of that country’s Gross Domestic Product (GDP) growth is reliant on infrastructure projects and capital. Exports, on the other hand, account for only 20 percent of China’s soaring GDP.

“In other words, this is hardly a nation that will wither and die on the vine if the West stops buying,” Fitz-Gerald said.

“We are dangerously close to a situation in which the West’s purchases become irrelevant to China’s continued growth. The United States and other Western powers may need China, but as China’s consumer strength grows, it’s increasingly likely that the Red Dragon and its consumers