Powerless again in the gathering storm
The humble sea container can tell us a great deal about the current global financial turmoil
When the chief executive of AP Moeller-Maersk says trading conditions are worse than 2008 – when the financial crisis was at its height – it may be time to stop complacently dismissing the current turmoil in stock markets as no more than an irrelevant mid-cyclical blip and start worrying. Few, if any, industries are more plugged into the vicissitudes of the global economy than container shipping; with a fleet of more than 580 vessels, Maersk is the biggest such company in the world, and therefore gets to feel the chill winds of any economic slowdown earlier and more acutely than any. We should of course be careful not to read too much into a single company’s travails. The Danish conglomerate’s problems are at least in part company specific. As a big player in oil as well as container shipping, Maersk has been hit hard by the collapse in energy prices. What’s more, plunging freight rates are as much about an evident glut in shipping capacity as any fall-off in underlying demand. Naively, shippers came to believe that Chinese-driven growth in international trade would go on forever, and bulked up accordingly. The dash for capacity has spawned a fleet of ever more monstrous vessels. Like Krakens from the deep, these newly built super-ships have hit the high seas just as the boom in trade begins to peter out. The travails of the humble container reflect, in three ways, a profound change in global trade. First, the composition of Chinese growth is changing, away from the export and investment driven model of the past to one which is more sustainably based, like its Western counterparts, on domestic consumption. More domestic consumption equals fewer containers. Secondly, fast-rising Chinese wage and social costs have prompted Western manufacturers to repatriate manufacturing previously “off-shored” to China. Local production – meaning, again, fewer containers – has blossomed around the world, but particularly in America, which has enjoyed a new competitive bonus of ultra-low energy costs from the shale revolution. Thirdly, the make-up of trade is also changing. No longer is it all about raw materials and tradable goods. The big growth is in services and people, neither of which requires much in the way of shipping. In terms of manufactured goods, it may be that we have already reached “peak globalisation”. All this provides a relatively benign explanation of Maersk’s troubles. The problems faced by the container are not necessarily a harbinger of global economic ruin to come. But... There is plainly some sort of a slowdown going on which is none the less real for being substantially sentiment driven. There are, admittedly, pockets of buoyancy, and the consumer economy in both Britain and the US remains relatively strong. But there is little sign of the broader revival in animal spirits you would expect to see at this stage in the cycle. Faced by a multitude of uncertainties, many chief executives have chosen to do nothing. With profound technological change across many industries, risk aversion remains the order of the day; the prevailing mindset is still one of retrenchment rather than expansion. Underpinning this safety-first mentality is a growing realisation that public policy has run out of road. Governments believe themselves to be already too heavily indebted to indulge in further fiscal loosening. Similarly, central bank stimulus seems to have reached the limits of its usefulness, threatening, to the contrary, only further bouts of financial instability. Even the feeblest possible of interest rate rises in the US was enough to trigger another round of panic in financial markets. Attempts by some to introduce negative interest rates have had a similarly destructive effect, by hitting banking profits and, therefore, the ability to rebuild still deeply impaired balance sheets. Bank share prices have collapsed accordingly. Seemingly, central banks can go neither up nor down. In the event of another recession, there is nothing left in either the fiscal or monetary cannon to fire at the problem. Next stop would be the final destruction of sound money with a “helicopter drop” – crediting everyone’s bank account with the equivalent of a flat rate tax rebate, or otherwise letting rip on government spending, all paid for by the central bank with newly created money. This would certainly generate a temporary consumer boom, but it is hard to see how it might help in a country such as Britain, which already runs a substantial current account deficit. Britain needs a revival in business investment, not another dose of unearned spending. Even if thought theoretically appropriate, helicopter money would trigger a collapse in international confidence in the UK and a sterling crisis. It would almost certainly end in disaster. The global economy may be suffering for different reasons to Maersk, but like the company’s great container ships, it can now only hope to ride out the gathering storm.