The Gloom Factor

It’s back to reality with a bump today. Not all is gloom and doom but if you want to look on the not-so-bright side for a moment consider the following facts. Some aspects of international trade are barometers of the world’s future economic health. Not perfect barometers but good enough to take notice. They stem from two basic causes.

First, the oil price is in the doldrums. While that is initially good news for everyone except the oil producers themselves, it soon leaves so many people poorer that the consequence oftheir not spending becomes a drag on the world economy. Add a now seriously growing realisation of the importance of reducing the world’s carbon footprint and you make the oil-based world economy look bleak, at least for a while. Of course, the planet will benefit from this new attention to its health, and President Obama is to be congratulated on leading by example, but the short term impact on wealth will be painful.

Second, the impact of the internet on travel and especially moving goods long distances is biting like it has never done before. We notice it ourselves with people increasingly insisting on Skype as the basis for coaching and mentoring. This reduces tiresome travel to and from meetings. From our – and the planet’s – point of view that is a good thing. From the airlines and shippers point of view it is not.

Where do we see the signs that give us this gloom factor and is it serious?

The low oil price is now thought to be long-term. When Shell cuts 6,500 seriously senior jobs you know they are talking it to heart. A company run for stability of employment and predictability of behaviour this is hard for Shell. They wouldn’t do it unless they had to. Their results tell you the reason. They are down from US$5.1bn to US$3.4bn for the first quarter, year on year. Serious money. Another barometer company, UPS, had its year-on-year revenue cut by 1.2%, a small but significant indicator. Rolls Royce, now largely dependent on its aero engines business is shutting down its share buy-back scheme introduced only a year ago. This is to conserve cash – after their fourth profit warning in eighteen months.

Freight, both airborne and seaborne is shrinking. So much so that the International Air Transport Association (IATA) has reported that air freight load factors have dropped to lows not seen since 2009. Sea freight is no better and there are now 108 idle really big container ships, up from 82 a year ago. International trade usually goes up in the northern summer. Not this year.

World trade is falling at the fastest pace we’ve seen since the last financial crisis. Global trade shrank 1.2% in May from April. Some of this can be attributed to the nervousness created by the much-vaunted Fed’s impending decision to raise interest rates. These have been artificially low for too long, depriving many low-end investors of their rightful return on hard earned savings. Soon (probably) the Fed’s rate will be raised, ever so slightly. As usual the markets are overestimating the impact of this first, tremulous step towards financial normality.

But they are making some of us stay up a bit longer to think of the impact on world trade health.

And we don’t think the signs are encouraging.