When the logistics of the socio-economic artery stagnates, it often indicates that the economic recession will begin!
Standard and Poor's Global Market Intelligence Company's latest data in early September showed that due to the shrinking demand for goods, global trade volume slowed down, and freight rates continued to decline.
According to the research team, supply chain disruptions caused by the epidemic have eased and freight rates have also declined, but the slowdown in container and ship demand is largely due to weaker cargo flows.
And on September 16, World Bank released the latest comprehensive research report "Global economic recession is imminent?" 》 pointed out that as central banks in various countries raise interest rates and respond to inflation, the world may move towards a global economic recession in 2023, and a series of financial crises that are sufficient to cause lasting harm may occur in emerging markets and developing economies.
1. "Cliff-style" decline
Because cargo owners ship holiday goods early and inflation weakened consumer demand, freight rates on major marine trade routes also fell during the usual peak season.
"For spot shipping, the carnival is over," said Jonathan Roach, a container shipping analyst based in Braemar, London. “The potential global recession is driving down the market by soaring energy prices and rapid inflation.” The shipping rates for major trade routes have dropped by more than half since the beginning of the year, which is a potential sign that inflationary pressures and supply chain deadlocks have eased. Data from
Freightos shows that the cost of to ship a 40-foot container from China to the west coast of the United States is about US$4,300 (about RMB 29,955), a decrease of nearly 72% from mid-January.
(The port of Long Beach in the United States is no longer congested Source: JOC)
In comparison, the cost of container shipped from Asia to Europe is about US$7,800 (about RMB 54,336), a 40% decrease from the beginning of the year. The ratio of the two critical routes is still higher than pre-pandemic levels.
UK container shipping analyst Jonathan Roach wrote in a recent report: "The unprecedented rise in freight rates caused by the pandemic has reached its peak."
Freight rates from China to the United States and Europe rose to more than $20,000 (about 139,324 yuan) in September last year due to supply chain disruptions, port backlog and a surge in cargo. In the past two years, shippers have moved their goods to ports in the Atlantic Ocean and Gulf of Mexico , hoping to avoid congestion at ports on the west coast. New York Port and New Jersey Port said freight volumes increased by 34% compared to pre-pandemic levels.
(Shipping freight rates continue to decline Source: XENETA)
Norwegian transportation data and procurement company Xeneta pointed out that from June 2021 to March 2022, the long-term freight rates from China to the west coast of the United States almost tripled, and the freight rates for each container reached US$7,981 (about 55,739 yuan).
However, spot freight rates have begun to decline in March this year, and will reach a long-term price in June. Xeneta chief analyst Peter Sand said shippers are willing to pay long-term prices slightly higher than the spot price to ensure that their containers will be loaded on board.
Baltic sea freight index (FBX) shows that on June 29, the average shipping price of FBX containers was US$6,583 (about 45,975 yuan)/FEU, a sharp drop of 40.9% from the historical high in September last year. Among them, the freight rate of China/ Far East -North America West Coast route fell by 63.1% from the highest freight rate last year, and the freight rate of China/Far East-North America East Coast route fell by 54.6% from the highest freight rate last year.
2. High inflation, low demand
What has led to a sluggish demand for global shipping and cross-border logistics?
(I) High inflation is impacting the US consumer economy
Consumer spending accounts for more than two-thirds of US economic activity. But the resilience of American consumers is being tested.
inflation has soared to its highest level in 40 years, causing real wages to drop rapidly. Lending rates are also growing rapidly. Workforces have remained strong so far, but the whispers of layoffs are turning into a chorus.
Increased cost of living and decreased demand have made enterprises "more paying attention to" the economic prospects. U.S. economists say the "increasingly aggressive interest rate path" outlined by the Federal Reserve and the "consequent deterioration" of the broader financial situation has also put pressure on businesses.
In addition, the economist warned that business confidence has dropped to a level that “usually heralds a recession”, which increases the risk of an economic recession. He added that although price pressures have "peaked", they continue to stay high.
This highlights that as the cost of living and inflation rises, consumer demand falls, and the risk of a global recession is increasing. Part of the economic slowdown has been blamed on the conflict between Russia and Ukraine and the epidemic lockdown. Europe and the United States are experiencing high inflation that has not been seen in decades. Overall inflation is around 8% – but the actual potential inflation rate in the United States is higher.
(US prices rise and goods are unsalable. Source: Time.com)
Since the outbreak of the epidemic, the cumulative inflation rate in the United States has been about 3 percentage points higher than that in the euro zone. But the U.S. inflation peaked in March 2022, while Europe is still rising. In the first four months of 2022, the annualized inflation growth rate in Europe was 12%, while the United States was 9%.
(II) Two prominent reasons for high inflation in the United States.
The reasons for high inflation in the United States are supply chain factors and US financial policy factors.
First, it is an attempt to decouple from China's supply chain, resulting in an imbalance in domestic supply and demand. During Trump's administration, the US government sought to suppress "Made in China" with high tariff exclusion, promote the decoupling of the supply chain to China, and seek alternative supply chains in US allies, as well as markets such as India and Vietnam.
However, the global supply chain system is not as expected by the United States, and China is still the world's largest commodity supply market with high quality and low price. The anti-global supply chain cooperation behavior since Trump to Biden has actually backfired on the interests of the United States with intensified inflation. Prices soared by 8.6%, with inflation in the United States reaching its highest level in 40 years in May 2022 . From natural gas to food, the rising costs have put huge pressure on American households.
The second is The Federal Reserve raises interest rates , accelerating inflation. The Federal Reserve has raised interest rates three times this year, the most recent time was 0.75 percentage points in June. But it has limited effect on very unstable commodities such as food and energy. Since the epidemic, the US government has been continuously adopting "no lower limit" measures to stimulate the economy, dragging the world economy into the vortex of the US economic recession.
In order to respond to the impact of the epidemic, the Federal Reserve began to increase the money supply "unlimited" in early 2020, injecting a large amount of liquidity funds into the market.
In order to deal with inflation, the Federal Reserve raised interest rates by 75 basis points twice in a row. It was hoped that the United States would be back on track, but the result was that the whole world would take the blame together. On May 4, in order to cope with excessive inflation, the Federal Reserve announced a 50 basis point interest rate hike, setting the largest single rate hike since 2000.
From historical experience, Radical monetary policy may harm itself and affect the world. The Fed's efforts to fight inflation may put the US economy into recession, and may also trigger a series of economic crises in developing countries around the world.
(III) The fermentation and supply chain of global inflation.
To survive the pandemic, many emerging economies have become heavily in debt, and high interest rates make their huge debts even more expensive. Most importantly, the war in Ukraine caused a surge in food and fuel costs.
Under the influence of factors such as soaring energy prices and supply chain problems, the inflation level in the euro zone continues to be at a high level. In August, the euro zone inflation rate was still around 9% on an annualized basis.
Europe's relatively large inflation rate is mainly due to the sharp rise in natural gas prices (three times that before the Russian-Ukrainian conflict). Although inflation is happening around the world, these effects are much worse in Europe than in the United States.
In addition, some of the excess core inflation in Europe was also imported from the United States. Since the Federal Reserve has raised interest rates sharply, and European Central Bank (ECB) has not raised interest rates sharply, the current investment conditions in the United States are significantly better than those in Europe.
Professionals are now more willing to invest in the United States than in the euro zone. They can sell the euro and buy the dollar. Demand for the euro fell while demand for the dollar rose.
In addition, due to the conflict between Russia and Ukraine, only judging from the geographical location, the Ukrainian war has a greater impact on Europe compared with other continents. However, the reason why the Ukrainian war had a greater impact on the euro was the establishment of more commodity trade with Russia and Ukraine, especially oil, gas and coal from Russia.
If the conflict between Russia and Ukraine is resolved and energy and commodity shortages are alleviated, Europe may recover quickly. But prolonged wars may exacerbate inflationary pressures entering a cold winter.
3. Is it hard to see prosperity before Christmas?
In the past, the third quarter of each year was the peak logistics season. The pre-Christmas logistics fever in the United States and the cross-border logistics fever in China's Double 11 cross-border logistics fever are both demand engines.
However, this year's shipping prices have experienced a "cliff-like" drop. Experts analyzed that under the influence of the sharp rise in energy prices and inflation, the shipping market may continue to fall.
(87.6% of the products on the United States are from China Source: www.visualcapitalist.com)
(I) China's export orders were cancelled, logistics demand was in a hurry
China's Shanghai export container freight rates fell for 13 consecutive weeks. The price of 40-foot containers from China to the West Coast of the United States was about $10,000 in January, and plummeted to $4,000 in August. Compared with the average price of $20,000 in the past, it can be seen that the golden age of shipping companies has passed.
The fundamental reason for the price collapse is the imbalance of supply and demand. There was a crisis of out-of-stock during the epidemic in the past. Therefore, in order to prevent from shutting down the supply of , many countries have a high pressure on inflation this year, and demand has declined. Previous inventory cannot be sold, resulting in a reduction in freight demand.
Recently, some companies said that their orders for sale abroad were cancelled for no reason, and more than 8,000 products were piled up in the warehouse. Now production is forced to stagnate. The angrily complaining sound of workers in the workshop replaced the previous noise of the roaring machines. The cancellation of overseas orders and sharp declines in quantity of the above factories are not isolated cases.
Recently, overseas orders in my country's foreign trade industry in Europe and the United States have been cancelled and postponed on a large scale, and many industrial clusters such as textiles, electronics, and furniture have all fallen into a dilemma. The report said that the large retailer Walmart canceled billions of dollars in orders in August, and the large number of canceled orders represents the shrinking procurement and consumption capacity of European and American countries.
(U.S. importing country of Christmas supplies: www.visualcapitalist.com)
Affected by the conflict between Russia and Ukraine, energy supply shortage and economic recession, the euro depreciated rapidly, and the exchange rate against the US dollar fell below the 1-to-1 mark, hitting the lowest level in nearly 20 years. Under the combined influence of factors such as unstable and uncertain shipping prices and logistics, weak consumer markets in Europe and the United States, and diversion orders in Southeast Asia and other countries, the order volume of many foreign trade companies in my country has dropped significantly.
Although Europeans are now depressed due to high inflation, Christmas is still coming, and the demand for Chinese goods is still very high.
(II) Can Vietnam and India take away China's foreign trade orders?
American media claims that there is no imported products from China, and there is no Christmas in the United States. At least there will be no Christmas lights, decorations, or a game console wrapped and placed under a Christmas tree.
The top 10 Chinese products that account for more than 90% of the imported Chinese products in the United States are laptop , game consoles, Christmas supplies, rubber boots, ceiling fans, other holiday supplies, synthetic blankets, hair products, portable lights and Christmas lighting.
From January to September this year, the United States imported $1.1 billion (about 7.68 billion yuan) worth of Christmas accessories from China, accounting for 92% of the US Christmas accessories import market. This does not include the $346 million Christmas lights, and 87% of the United States’ imported Christmas lights also come from China.
(Christmas made in China Source: Time.com)
①Supply Challenge in Vietnam. From the perspective of the import structure of the United States, Christmas purchases are concentrated in labor-intensive consumer goods such as textiles, clothing, toys, etc., and China and Vietnam are their main sources of imports.
In terms of population, Vietnam is only 1/14 of that in China. Currently, the total population of Vietnam is less than 100 million, and the labor force is 57.5 million, of which only about 12% are specially trained production technical workers. This number cannot be compared with China and cannot meet the urgent demand for Christmas orders. In addition, Vietnam's infrastructure such as roads, ports and cargo loading and unloading capabilities are still under construction, which is obviously unable to compare with China's huge and complete infrastructure system.
This year, due to the epidemic and conflict between Russia and Ukraine, Vietnam's production activities stagnated and could not quickly form production capacity, so it was difficult to meet the needs of the United States' Christmas procurement, which led to the concentrated transfer of Christmas orders to China. Compared with China, Vietnam's biggest problem lies in its supply chain and labor force.
② India's supply chain ambitions. The big producer of is trying to position itself as a replacement for China, but this is a trend that concerns the Indian government, and in the post-epidemic era, many multinational companies are seeking supply chain diversification.
India's Commerce and Industry Minister Peyush Goyal told parliament late last year that between 2014 and November 2021, a total of 2,783 foreign companies with registered offices or subsidiaries in India closed their operations in the country. This is not a small number, as there are 12,458 foreign subsidiaries in India.
Since many industries in India have not yet formed their own industrial chains, they rely heavily on foreign companies. Against the backdrop of constantly shutting down foreign companies, India's industrial chain has also been hit hard.
India has another natural flaw, that is, it has not carried out thorough social reforms, so it cannot completely release productivity. For example, the absence of land reform, the caste system still exists in all corners of society, and women are not liberated... These factors seriously restrict India's productivity.
In short, although shipping freight costs have dropped sharply, due to the large demand for imports in Europe and the United States on Christmas, it still has a certain delaying effect on my country's foreign trade.
(Author: Guan Yi)
