GDP vs. TEU -Drewry
The strength of first-half 2014 container flows from Asia to Europe flies in the face of the macro-economic data coming out of Europe.
As highlight in last week’s analysis of the Asia-North Europe trade, disappointing recent economic news coming out of Europe does not chime with the robust growth reported for some of the big ocean container markets.
Gross Domestic Product
Note: * % change on previous quarter, annual rate
Sources: IMF World Economic Outlook, July 2014; various others
Eurozone GDP flat-lined in the second-quarter as its three largest economies; Germany, France and Italy all stuttered. Germany, which accounts for roughly one-third of the entire Eurozone economy, contracted at an annualized 0.6% in the second quarter, held back by weaker exports, while France reported a 0.1% fall, forcing the government to concede that it will not reach its annual growth or budget deficit targets. Italy slipped back into recession as the economy contracted for the second quarter in a row, this time falling by 0.8%.
There are some bright spots in Europe with Spain, Portugal and the Netherlands all posting annualized GDP growth over 2%, while outside the currency zone the UK was up by 3.4%.
In Asia, China continues to set the pace with second quarter GDP growth of 8.2%, but the Japanese economy fell by 6.8%, its worst performance since the tsunami in 2011.
These are not the sort of economic statistics that would have suggested the good times were coming back to the container sector, yet first-half growth in the largest deep-sea trade from Asia to Europe and the Mediterranean (including North Africa) reached 8% year-on-year, see Table 2.
Asia-Europe/Med container traffic growth in the first-half 2014
So, how to explain these seemingly conflicting trends? The first thing to acknowledge is that using GDP to forecast container flows has its limitations. As the broadest measure of economic health GDP is one of the drivers of long-term aggregate growth in trade (see Fig 1), but can be a poor guide when making predictions on short-term trade prospects.
Relationship between world GDP and port handling, % change on previous year
Sources: Drewry Maritime Research (www.drewry.co.uk, Container Forecaster, 2Q14 report); IMF
Note: *current prices, USD
As much as international trade feeds GDP and vice versa, GDP also reflects changes in domestic economic activity not related to exports and imports and other economic inputs such as investment and productivity. Moreover, container traffic growth is influenced by factors other than GDP, including the multiple physical transport of parts, intermediate goods and finished goods and the increasing containerization of certain commodities. The shortcomings of GDP increase when trying to forecast container volumes at the trade route level. Currency exchange rates, supplier prices, inventory restocking, trade imbalances and transport costs can all have a dramatic effect on short-run volumes.
GDP is a lagging indicator and market expectations can affect international trade. If the market expects a recovery, consumers will change their spending habits, which can lead to higher demand and translate to higher international trade, eventually feeding back into economic growth. While the second-quarter GDP growth rates around Europe were largely disappointing, better is expected for the full year, see the IMF’s recent update in Table 1, and it could be that the stronger container flows of the first half are a precursor to improved GDP.
The second thing to consider when squaring the high container/low GDP growth conundrum is: how is the data being interpreted? Monthly, and even quarterly, trade statistics are prone to large growth swings as year-on-year comparisons can be skewed by a range of factors, from movable national holiday dates in China to shipments being brought forward to avoid General Rate Increases or port labor issues, as seen recently on the US West Coast.
The fixation on y-o-y growth patterns can lead to misinterpretation of the underlying trend. The 8% growth for westbound Asia-Europe at first glance looks very impressive and well beyond what Drewry predicted for the full-year. However, a look at Fig 2 shows that the first and second quarters in 2013 were weak with volumes roughly at the same level as in 2011 so growth this year has come off a low base.
Seasonality in the westbound Asia-Europe/Med container trade
The same chart shows that y-o-y growth was really strong in the third and fourth quarters of last year – even though total volumes were still on a par with 2011 – meaning that maintaining the 1H14 growth ratio is extremely unlikely.
One way to smooth out the erratic fluctuations is to apply a moving average of monthly volumes. Figure 3 shows how using a 12-month rolling average of westbound Asia-Europe/Med volumes is sufficient to spot the underlying upward trend and avoids placing too much importance on the short-term growth spikes and troughs. Taking this approach makes it clear that “real” growth in the trade started in August last year and has been gradually building ever since, but a couple of percentage points lower than suggested by the most recent unadjusted monthly data.
Taking a longer view: 12-month rolling average of westbound Asia-Europe/Med growth, % change on previous year
An understanding of the relative importance of the data is crucial. Table 2 highlights that the drivers of the overall trade growth were the established markets such as China to Germany and the UK, and as such most attention should be paid to the influencing factors in those countries to accurately forecast short-term trade flows.
What other indicators should be monitored to predict short-term volume patterns?
Retail sales in the big European consumer market are a strong lagging indicator. As Figure 5 shows consumer spending is rising fastest in the UK, but is only meandering in Germany and across the wider European Union, indicating that future container growth to the region will remain patchy.
Retail sales of non-food products (except fuel), seasonally adjusted [2005=100]
Another big driver of bi-lateral container trade is changes to currency exchange rates and as Figure 5 highlights the Chinese Yuan is weakening against the dollar, euro and pound sterling. Combine this with low interest rates in Europe and the US with falling ex-factory prices in China (see Fig 6) it is clear that the competiveness of Chinese goods is not diminishing. This probably means that western consumers are buying an increasing volume of Asia-made products, but without spending more money.
Weaker CNY promoting Chinese exports, currency exchange rates [02 Jan 2014=100]
China Producer Price Indices, % change on previous year
Source: National Bureau of Statistics of China
Note: The PPI measure change to the prices of industrial products when they are sold for the first time after production.
Good forward-looking indicators include manufacturing industry’s Purchasing Managers Indices (PMIs), with the new export orders sub-index of the Chinese PMI the most relevant for short-term container demand. Figure 7 shows that Chinese new export orders are hovering around the 50-point number indicating slow and steady expansion.
China Manufacturing PMI for New Export Orders, seasonally adjusted
Source: China Federation of Logistics & Purchasing (CFLP)
Note: A PMI reading above 50 indicates an overall expansion in the manufacturing sector; below 50, an overall contraction.
The European Commission also publishes timely monthly surveys that give a snapshot of business confidence and expectations across nations in the region (see Figs 8 and 9). Although not as easy to interpret as they use “balances” that present the percentage difference between positive and negative respondents,they are another useful guide to future container traffic.
The latest PMIs and other key trade indicators are published by Drewry in its monthly Sea & Air Shipper Insight report.
Looking at this basket of economic indicators suggests that container traffic between Asia-Europe will continue to rise in the short term, but that growth will be far more modest than seen in the first half of the year.
Business Climate Indicator: German retail industry
Source: European Commission (Directorate General for Economic and Financial Affairs)
Note: Answers obtained from the surveys are aggregated in the form of “balances”. Balances are constructed as the difference between the percentages of respondents giving positive and negative replies.
Business Climate Indicator: UK retail industry