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Industrial improvement in China amid global recession

Jeffrey Landsberg from Commodore Research has good news from China for dry bulk owners.

As we have been stressing in our weekly dry bulk reports, China has finally seen its steel output and thermal coal burn revert back to experiencing year-on-year growth. Previously, steel output and thermal coal burn had each not experienced year-on-year growth since the middle of December. As we also have been stressing in our weekly China reports, though, there remain significant issues in many Chinese consumer sectors. At present, it is in the industrial sectors where there have been new encouraging changes in China, and for the dry bulk shipping market this has been helpful for the spot market.

China’s housing market remains a long-term structural problem, as 2022 ended with the largest amount of available housing floor space seen in China since 2017. Also remaining concerning in China is consumers have not actually been buying more goods. Instead, they simply have been paying more.

As we have been examining in our weekly China reports, the four most recent months of available data have all shown inflation in China exceeding retail sales growth. Remaining particularly troubling is that this consumer distress started in September, which was well before China’s most recent coronavirus wave began.

We have also examined data from several other economies and must note that much, if not all, of the world is experiencing similar consumer weakness. Consumers buying less goods is not only an issue in China. It is occurring around the world.

Retail spending is a common data point released by governments that shows if spending among its citizens is rising or declining. It is measured in the nation’s currency and not goods, however, and can rise simply if inflation is rising. It is not adjusted for inflation. To more accurately get a sense of how consumers are actually faring, it is much more helpful to compare retail sales growth to inflation. If retail sales are rising by less than inflation, then consumers are actually buying less goods.

When consumers are buying less goods, it is a sign of significant economic distress. Unfortunately for the global economy, the world has been rife with such weakness, and recent months have seen the problem intensify. Brazil, Mexico, and Russia saw inflation exceed retail sales growth during every single month last year. In South Korea, this new distressing reality commenced in February, in the European Union it commenced in March, in the United States it commenced in October, and in Japan it commenced in November. Citizens in countries around the world are not buying more goods. They are just paying more.

Also remaining a cause for concern in the global economy is that steel output continues to contract on a year-on-year basis outside of China. Crude steel output outside of China totaled 65.8 million tons last month, which is down year-on-year by 7.5 million tons (-10%). Crude steel output outside of China has now contracted on a year-on-year basis for eleven straight months.

Overall, there continues to be debate regarding if the global economy has been in a recession. If steel output outside of has continued to contract on a year-on-year basis and actual purchases of retail goods have also been in a contraction, then yes the global economy has very likely been in a recession. Regardless of the term one chooses to use, the great weakness being seen in the global economy has been a factor behind recent distress in the dry bulk market. China, though, is at least finally showing significant improvement in various industrial sectors.

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