Claims of rebound in global trade premature

The ‘state of the economy’ report, released last week by the Reserve Bank of India (RBI) in its monthly bulletin, says that even as global growth is set to slow down or even enter a recession in 2023 as global financial markets wager, India has emerged from the pandemic years stronger than initially thought, with a steady gathering of momentum since the second quarter of the current financial year. 

On the supply side, agriculture is into a seasonal uptick, industry is emerging out of contraction and services have maintained momentum.

The report says consumer price inflation remains high and core inflation continues to defy the distinct softening of input costs.

The report says that in terms of trade activity, the Baltic Dry Index, a measure of shipping charges for dry bulk commodities, shot up 45 per cent in February, and rose further in early March, on the back of an increase in demand for capsize ships, and that this points to a possible rebound in world trade that had contracted in December 2022 by 3.0 per cent (YoY) due to a steep negative momentum and an unfavourable base effect. Whether the Baltic Dry Index can be taken to be a reliable indicator of the trade activity is a moot point, as it broadly measures the costs of shipping bulk goods that depend on supply and demand for shipping space. 

When the global trade is sluggish, the shipping lines tend to restrict the supply of shipping space by scheduling fewer sailings or opt for blank sailings, and thus not allowing the shipping costs to go below a certain level.

The monthly container logistics update for March, released by container x-change.com, an online platform for container logistics and operations, says that there is a glut of empty containers, especially at Chinese ports. 

The expected boost in shipments from China after relaxation of the Covid-19 restrictions has not materialised. 

The economic rebound in China has also not been enough to firm up the commodity prices. Crude oil is now trading in the vicinity of $75 per barrel.

In recent days, the monetary authorities in the advanced economies have raised the interest rates with a view to bring down inflation. The idea is to nudge the economies towards lower growth rates dampening the demand. How well the strategy will work is difficult to say but any drop in demand may result in global trade slowing down. 

Another factor is the recent failure of some banks in Europe and the United States, mainly due to rising interest rates.  

The RBI report says that while the direct impact of the recent bank collapses in the United States on economic activity could be limited, markets are bracing for tighter financial conditions which could present a trade-off between financial stability concerns and monetary policy. 

The monetary and fiscal authorities have responded very quickly to prevent any contagion effect of the bank failures but it is quite possible that at least some of the regional banks in the United States will be less willing to lend as liberally as they did say a month back. The resulting tightness in the credit markets can also lead to a slowdown.

Thus, the claims of a global trade rebound appear somewhat premature, at least for now.

email: tncrajagopalan@gmail.com