We are still describing a world in the grip of inflation, hovering around 10% in major western economies. But maybe the next chapter has already begun. It won’t be a pretty sight either. Historically, the natural therapy to end an inflationary cycle is recession.
The signs are already evident in a sector that has often played a predictive role: maritime transport. the memory of the inflation fueled by this is still fresh: skyrocketing transport costs, especially the freight rates for ships and containers. We’re returning from a time when the merchant marine was a high-price factory: in supermarkets, at car dealerships, throughout the distribution network, stuff didn’t arrive on time because it was blocked by terrible traffic jams in ports; When the price tag finally came, it had risen alarmingly, as the shortage of merchant ships was driving costs insane.
The next episode is already underway, with a sudden and spectacular reversal. Now too many ships are available and empty, shipowners can’t find customers who want to ship goods on their containers. The major shipping companies are canceling trips on the most important routes. The world’s number one in maritime transport is the Mediterranean Shipping Company, better known by the initials Msc. owned by an Italian shipowner, Gianluigi Aponte, although based in Geneva. MSC has canceled travel on one of the world’s busiest routes, which crosses the Pacific Ocean from China to the Port of Long Beach (Los Angeles), California. According to a company statement, demand for freight bound for the west coast of the United States has dropped significantly in recent weeks.
The same applies to other shipowners such as the Danish group Maersk. The slowdown in activity is also affecting the routes connecting Asia to Europe. In the first week of October, a third of the total load to be transported was lost and future prospects are deteriorating. All shipowners in the world are reviewing their autumn-winter plans and on many routes voyage cancellations follow one another. Between the US West Coast and Asia, 40 trips have already been canceled due to a lack of customers, and 21 between the East Coast and Asia. Already in September there had been a 13% drop in activity, equivalent to 20 8,000 container ships disappearing from the seas because they did not have enough cargo to carry.
How quickly the economic situation changes. A year ago at this time the issue was port congestion from too much traffic. To address the congestion, major American distribution groups like Walmart and Home Depot had to source their own ships in October 2021 to circumvent the unavailability of shipowners, who were overwhelmed by excessive demand. Today, on the other hand, the logistics giant FedEx is forced to park planes that have nothing to transport.
Part of this reversal can be viewed as a spectacle of market forces in action. The market economy inherently has the ability to respond to imbalances in supply and demand. After the import-export boom a year ago – which in turn was a reaction to the lockdown paralysis during the pandemic – shipowners have tried to chase demand and increase their transport capacities. The big consumer goods makers have been stocking up to avoid cornering: Nike now has 65% more inventory in its North American stores than it did a year ago.
The adjustments prepare for the next cycle, from which we see the precursor signals. Among the victims of the trend reversal is the “Made in China” that is beginning to fail. Bad news for the world’s second largest economy, which remains heavily dependent on exports. In 2022, more than a third of China’s growth will come from sales in overseas markets. This shows the difficulty Xi Jinping is encountering in retooling China’s economic model and making it more domestic-demand oriented.
Also in this case there is a downside, and positive for us. A slowdown in exports will reduce energy use by Chinese factories, calming oil, gas and coal prices. With China being the largest single energy consumer on the planet, monitoring its economic development is essential to predicting where hydrocarbon prices and our bills will go in the future.
While we are still grappling with an enormously expensive energy dooming us to a harsh winter, a next phase is upon us that will be characterized by falling demand and prices. The market economy, with its responsiveness and adaptability, is today the best aid that central banks can use in their fight against the insane price frenzy. A recent poll shows that young Americans between the ages of 18 and 24 view capitalism negatively and socialism positively. This is not in favor of the quality of the education they receive in schools and universities. Xi Jinping’s return to socialism in China coincides with the sharpest slowdown in China’s economic growth since the transition to a market economy that began under Deng Xiaoping in 1979.
October 3, 2022, 8:25 p.m. – Change October 3, 2022 | 20:30
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