Container Crisis Turns Infallible Rate That Anticipates Recession

The Dry Baltic Index acquired the adjective of infallible when it began to collapse in late 2007. Few had been able to detect what was coming in 2008, the collapse of Lehman Brothers that caused a financial earthquake that ended up sinking the global economy. Shipping was one of the first sectors to anticipate the collapse of the financial system. Is the same thing happening now?

The Baltic Dry Index accumulates a fall of more than 50% since its last maximum on October 7. The dramatic decline was not seen since late 2007 and early 2008, months before the financial system collapsed. Since then this indicator is one of the most followed to anticipate recessions. Together with the inversion of the interest rate curve in the US, it was one of the few indicators that warned in advance that the world economy was entering a recession.

The spectacular decline, given its history, anticipates at least a strong slowdown in the world economy. Got the last three recessions right. “Everything could be, but it must be remembered that, although the fall of the Baltic index always begins before recessions, so it can be considered its herald, not always when the index falls sharply there is a subsequent recession“, clarifies the economist Juan Ignacio Crespo, one of the few experts who warned more than a decade ago that something was wrong in the markets, supported by this index.

Focusing on dry raw materials works as a leading indicator

What is unique about the index is that it reflects the average evolution of what merchants pay for bulk ocean freight. Now that freighter rates are being scrutinized. It is important to take into account the difference between the freight used to move raw materials such as wheat or soybeans, to the container freight used to transport intermediate or final goods. The content referenced by the Baltic Index refers to large quantities of bulk goods, a quality credited with being a leading indicator of the economy.

But the nature of the current supply crisis is caused by the closure of economies and the centers of production and distribution of goods, which makes it special. Maritime transport has never experienced a collapse, accompanied by excess demand that further complicates the situation. Supply chain problems dominated the latest US earnings season. The mention of this circumstance shot up 412% compared to last year, according to Bank of America. Proof of how exposed companies are to maritime trade. 95% of world transport is carried out by sea.

Under normal circumstances, maritime trade accompanies economic developments. But the stoppage of supply chains caused by the pandemic has broken the correlation in an exceptional way. This time, the fall of the Baltic index does not mean a relapse of the economy Or, at least, that is what most analysts suggest. “Signs of potential port improvement once the great pre-Christmas rush is over support hopes that supply restrictions can be resolved step-by-step in the course of 2022,” they say from Berenberg. “It will allow economic growth to pick up again after a temporary slowdown in Europe later this year,” the firm adds.

But now experts point out that the Baltic signals an improvement in transport

Jefferies analysts also expect the shortage to intensify in late 2021 before demand shifts to services. “Supply chain bottlenecks begin to clear by the first quarter of 2022, as seasonal demand drops dramatically and inventories rebuild,” they explain. The bottlenecks originated at the beginning of the pandemic with stops at production centers in China. Then they spread to the rest of the region until they caused bottlenecks in ports, which is still noticeable due to occasional stoppages due to outbreaks and a lack of labor.

In the last three recessions, the Baltic Index had anticipated them months in advance. But in its recent history, “strong falls can be seen between 2014 and 2016, although the economies skirted the recession, they did not fall into it,” recalls Crespo.

Too the Baltic index fell sharply between 2010 and 2013 without a global recession. The United States avoided it and in Europe the peripheral countries suffered mainly, along with Japan. “You have to be vigilant, just in case, but not always when the Baltic Index falls, a recession follows,” Crespo emphasizes.

What the Baltic Index did anticipate with the highs until October it was the uncontrolled excess of demand that has overwhelmed the distribution networks. The index appears to also work to detect inflationary pressures for economies. The next few months will decide if the leading indicator has worked again. If you are correct, you are not only anticipating a recession, but also the toxic scenario of inflation due to falling GDP and skyrocketing prices.