Economic data for the first quarter of 2015 is poor. Retail sales in the United States went nowhere in April. GDP growth is nothing to write home about. In fact, Germany dipped below France and Italy in the first quarter of 2015. Europe’s industrial engine, Germany, is sputtering.
Macy’s CEO, Terry Lundgren, said last September, “The consumer has not bounced back with the confidence that we were all looking for.” And more recently, Stephen King, the chief economist at HSBC, is quoted as saying, “The world economy is like an ocean liner without lifeboats.” Finally, the Bank of England has just cut its forecasts for Britain’s GDP for the next several years.
Shipping executives need to be aware, whether this is simply a delayed cyclical recovery or something more structurally wrong with the world’s economy, they cannot count on a return to decent growth. Clearly there are problems that may persist. It has been over six years since the financial collapse induced recession began. Are the economic beliefs held by politicians driving failed economic policies? How can the shipping industry weather these storms if the headwinds are caused by entrenched elected officials?
Some economists write that a return to recession is a possibility. But in reality, countries, like Greece, with unemployment near 25% are in a depression. Even developed countries such as the United States with much lower unemployment rates are hobbled by underemployment. For more than six years the recovery has been tepid. In addition, policy makers have used up their ineffective tools, which center around central bank quantitative easing.
It is time that beliefs and the ideologues who espouse them are replaced by pragmatic policies and officeholders who look at numbers and act accordingly. In other words, replace religion with science. In particular the religion of austerity must go. Of course that also means the high priests of austerity such as Wolfgang Schaüble, Angela Merkel, David Cameron, Shinzō Abe, et cetera need to go. They have all relied on central bankers, such as Janet Yellen and Mario Draghi, to pump cheap money into the banks, hedge funds, stock market, and private equity firms with no resultant increase in real employment. Hence the increase in GDP does not reflect a recovery in the working class, which provides the real engine for a modern economy. Unfortunately, these very politicians are popular.
In addition, the leaders who were elected with massive mandates for change have folded like a cheap suit. Think Barack Obama and François Hollande. Obama gave up his one trump card when he, as president-elect and then president, and the then speaker Nancy Pelosi, also a Democrat, orchestrated the financial bailout requested by President George Bush’s Secretary the Treasury, Hank Paulson. Pelosi and Obama should have demanded a quid pro quo that funded infrastructure spending and financial system reform. But they didn’t and for over six years their missed opportunity has allowed conservatives to block any stimulus that creates jobs. Hence there is no foundation for recovery and, more importantly, no prospect for policies that would sustain a solid recovery.
Hollande was elected to bring back France’s economy but he seems to be Merkel’s poodle. He has not stood up to her; his popularity has collapsed. Like Obama he has failed to set his country’s economy on a track to prosperity. He should have countered the Merkel and Schaüble austerity policies being imposed on Spain, Greece, Italy and other southern European nations. GDP growth has been lackluster, but more importantly, unemployment has persisted at too high a level for too long a period of time in most of the countries outside of northern Europe.
The one bright spot is China. It is led by engineers instead of lawyers and professional politicians and it has the political structure where beliefs and emotions do not rule to the same extent as in the western democracies. The Communist Party may make mistakes, but they have been able to tweak policies or change course easier than the western democracies have demonstrated they can. The leaders running China are pragmatic. The days of double-digit growth have probably passed; however, as Chinese exports rely less on the US and EU economies, their slower growth should be solid. One problem would be if China’s leaders copy western policies too much. Will they follow Japan’s road of continued deflation? China now has a huge income inequality as that in the West. Will they learn from the West by seeing not only what works but also what hasn’t worked in the US and the EU?
So what does all this mean for shipping? First, there will not be a change in policy for years. The electorates in the US, UK, and Germany support austerity which has not provided robust growth. Second, shipping must forget optimism and guide its own future by continuing to eliminate overcapacity. Only when the ideologues in the US and EU are replaced with practical leaders will solid growth return. As Ross Perot, the failed US businessman turned politician, is supposed to have said: “Lift up the hood and get to work on the engine”. Since that is not on the cards for the near future, shipping, especially the dry bulk sector, needs to operate on the expectation that capacity growth needs to be cut and market share should not be a priority.
When dry bulk rates do rise, remember what General George S. Patton, Jr. said: “For over a thousand years Roman conquerors returning from the wars enjoyed the honour of triumph, a tumultuous parade. In the procession came trumpeters, musicians and strange animals from conquered territories, together with carts laden with treasure and captured armaments. The conquerors rode in a triumphal chariot, the dazed prisoners walking in chains before him. Sometimes his children robed in white stood with him in the chariot or rode the trace horses. A slave stood behind the conqueror holding a golden crown and whispering in his ear a warning: that all glory is fleeting.”
Spikes in the Baltic Dry Bulk Index are also fleeting.