The Potential Impact on Shipping of a Global Recession

The Potential Impact on Shipping of a Global Recession

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As the global markets reel from the impacts of the CoronaVirus pandemic, it has now become increasingly accepted that we are headed for, or already have entered, a global recession.

The question now is what will the impact of such a recession be, particularly on shipping.

Projections of Economic Impact of CoronaVirus

In a fairly ominous report sent out this week, Morgan Stanley stated that “Global recession in 2020 is now our base case.”

According to the company, the recession will be deep and far-reaching “with Covid-19 spreading in Europe and the US after hitting Asia, the disruptions and dislocations in the economy and markets will trigger a [year over year] contraction in global growth in [the first half of 2020].”

On a more positive note, Morgan Stanley believes that the recession itself will be short-lived and that we will see a bounce-back in Q3. The base-case sees negative growth for Q1 and Q2 but by Q3 – due to “strong monetary and fiscal policy response” – we will begin to see growth again.

In a sobering assessment, Morgan Stanley stated that we will be entering a situation that is “worse than the global recession of 2001.” In addition, we’re looking at a $360 billion loss in nominal GDP.

What Happens to Shipping

Shipping, especially global shipping, is uniquely vulnerable to recessions and the effects of the downturn of 2008-2009 are still being felt today.

Truck, Rail, Freight, Air: While the potential recession will likely be global, it will also have a significant impact on domestic shipping. In the summer of 2019, we got a taste of what’s to come from a recession: there was a 5.3% drop in air, rail, freight, truck volume from the same time the previous year.

A report put out by Moody’s this week cites the transportation industry as one of “high exposure” to a recession in the current climate. The report projected that the industry will suffer from supply chain disruptions that will affect freight, trucking, and other modes.

The global nature of a potential recession will impact domestic shipping as well, according to Moody’s “Lower shipments will impact the intermodal business of railroads and truck carriers.”

We should also factor in the fact that a recession would significantly impact the US consumer’s ability to purchase goods. In a recent meeting, the Fed Chairman Steve Mnuchin stated that the unemployment rate in a coming recession could reach as high as 20% if there was no government intervention.

Prior to the emergence of the CoronaVirus pandemic, consumer sentiment was at historic highs. However, as this situation escalated that number has dropped steeply. We are now in a situation where consumer sentiment is the lowest it’s been in 2 years – and there’s no indication that the trend will change.

The way consumers, especially US consumers, purchase products have changed drastically over the last decade. Now that eCommerce has overtaken brick and mortar as the preferred way to shop, shipping has emerged with even greater importance than ever before. Therefore, such a drastic dip in consumer sentiment, coupled with a higher unemployment rate, will mean significantly less online consumption. Which, in turn, will drastically impact shipping.

An article by FreightWaves from August 2019, gives us some insight into what we can expect to see from other modes:

Container Shipping: A 2018 study found that the multiplier of container shipping to GDP is 1.2, meaning for every point up or down of the GDP container shipping will go up or down 1.2%. However, according to the study, container shipping has become less connected to GDP than it was in the past. For example, in 2000 it was 4.

The overall effect on container shipping, according to the study, would not be negative growth: while the study found container shipping growing 20% in 2020 without a recession, it saw growth of 1% if one were to occur.

Tanker Shipping: One of the compounding factors of the current downturn is independent of the ongoing pandemic – there is a price war in the oil markets that are causing the price of oil to drop to historic lows due to a glut in supply. Prior to the current situation, the United States had increased domestic production of oil – mainly through shale – to historic levels. In return, OPEC and other oil-producing countries like Russia had limited their supply into the market in order to stabilize prices. However, over the last few weeks, both countries decided to flood the market. As a result, oil has dropped to historic lows nearing $30 a barrel.

Prior to the recession of 2008, US production was around 5 million barrels per day. By 2019, it was 12 million per day.

According to Clarkson Paltou, a global recession would take demand from the base-case of $60,000 per day down to $40,000 per day.

It Isn’t Permanent

No recessions, even depressions, are permanent. In addition, the US economy is in a far better position to handle a recession than it was in 2008. Even in Morgan Stanley’s dire report, they projected that the economy will begin to bounce back within 1-2 quarters.

There’s no doubt that difficult days lie ahead. However, we will weather this storm as we have weathered other storms before. Though there may be hardships in the near-term, we will find ourselves not so long from now back in a comfortable economic situation.

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