International Shipping Association BIMCO on Wednesday (25 March) published an article discussing possible outcomes for the shipping industry from the slowdown in manufacturing due to the COVID-19 pandemic:
As countries world-wide implement far-reaching measures in an attempt to contain the coronavirus (COVID-19), the global economy is starting to slow down significantly. The crisis is prompting flashbacks to the global financial crisis of 2008-09. Although the nature of this crisis is different, the economic impact is just as significant when looking at the flash Purchasing Managers’ Index (PMI) readings for selected European nations.
Global shipping thrives on industrial demand and consumer spending, and at this point in time, the PMI readings tell us that a storm is approaching, and demand is in for a sharp decline.
The flash readings of the Eurozone’s manufacturing PMI indicate a drop to 44.8 index points in March, a 92-month low, and down from 49.2 points in February. Germany’s manufacturing PMI is estimated at 45.7 index points in March, a drop of 2.3 points from February, while France’s manufacturing PMI is expected to drop to 42.9 index points, an 86-month low.
The pattern looks the same across the Eurozone. While the negative effects on the manufacturing sector seem limited to this point in time, the real depth of the crisis will become apparent over the coming months, as such a development comes with a delay to the manufacturing sectors.
More instantly, the services sector has taken a massive beating in just one month. The drastic slowdown has completely dwarfed the impact on the service sector experienced back in 2008-09.
Right now, supply chain disruptions have dented manufacturing, unemployment is rising fast, and the outlook is increasingly negative, partly owing to fewer new orders and a diminishing backlog of orders. Germany, for one, seems to be heading straight for a recession, just like the rest of the world will eventually do, according to an IMF statement from 23 March.
As one shock evaporates, another appears
The supply chain disruptions in the European countries stem from the wide-spread quarantines of China in February. As China slowly returns to normal, the supply chain disruptions will gradually fade and goods will start flowing again, but only until it is replaced by a negative demand shock, as the rest of the world takes its turn to battle the coronavirus.
BIMCO expects that container volumes out of China, containing intermediate and finished goods, will start to pick up in the short-term, but could stagnate or outright decline once the fallout from the coronavirus spread really tightens its grip on the advanced economies in the western world.
Shipping serves as the backbone of global trade, and while international trade of goods must continue amid quarantines, the lower demand for shipping could have unforeseen consequences for many companies.
While central banks and governments rush to implement stimulus packages to keep the economies afloat, it will bring little immediate relief to the shipping markets. There are no government packages which can offset faltering demand for shipping. Only when governments and authorities safeguard the free flow of cargo, the damage done to the shipping industry can be somewhat reduced.
Thus, the current objective must be to keep the free flow of cargo moving, not only to secure a global supply of food and goods throughout the crisis, but also to limit the impact to the shipping industry.
Photo credit and source: BIMCO
Published: 26 March, 2020
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