Baltic Dry Index (BDI) and the Economy
Global Economics Weekly Brief
After the excitement, achievements and celebrations at the Olympic Games, it is back to economic reality. The global economic slowdown is affecting us all, so there is no money for luxuries. As the Governor of the Bank of England made clear, “we are navigating rough waters and storm clouds continue to roll in from the euro area.” European problems are closest to home and the biggest threat to the UK, but there are worries from further afield too. US consumers are still holding back, and even the Chinese data have been disappointing.
Given the importance of China to the global economy, this isn’t welcome news. It will be a long hard slog, so even renewed and inspired by Team GB’s performance, in comfy old clothes with a belly full of porridge, the UK will have to put its nose firmly back to the grindstone to pull off a recovery. Why have the Bank of England paid bonuses to their staff to the tune of £25 million? Do not the B of E understand we are in recession again and there is no money available!
Baltic Dry Index (BDI) down 50% for 2012. Learn more further below.
The European debt crisis casts a long(er) and dark(er) shadow over the UK’s economic forecasts. The Bank of England cut its forecasts for economic growth in 2012 and 2013. The actual numbers aren’t out yet, but the charts in the Inflation Report suggest the Bank expects the economy to shrink a little more this year before returning to modest growth in 2013. It will take about another two years to get back to the pre-recession peak, but making up for lost ground means it will be a long slog before we feel more comfortable. Europe’s debt crisis, austerity and tight credit conditions will still hold us back, but lower inflation will help liven things up as a bit of consumers' spending power is restored. The Bank is also optimistic that the Funding for Lending Scheme will boost bank lending and encourage companies to invest more. The global economic rapid slowdown is affecting most, if you have liquid money hang on to it like most billionaires/millionaires are!
Is a cut on the cards? The Bank of England’s gloomy economic forecast is based on market expectations for interest rates, which include a cut to 0.25% in the no-too-distant future. So the question is, will the Monetary Policy Committee take the plunge and cut rates? We think that is unlikely – as does Bank Governor Mervyn King, apparently. He pointed out that such a small change “is not going to be the difference between having a recovery and not having a recovery”. It might even do more harm than good, he acknowledged, if it led to weaker profits for UK banks and so discouraged them from lending. The future is the same as it was in AD 33! See below.
UK production slumped due to public holidays. Industrial production fell by 2.5%m/m in June with the manufacturing sector down 2.9%m/m. The ONS highlighted the extra bank holidays as a key factor in the declines over the month. In annual terms both industrial and manufacturing output fell 4.3%y/y. While these data are undoubtedly poor, the decline was in fact smaller than the ONS had anticipated when compiling its first estimate of Q2 GDP. All things being equal, these figures imply a 0.1%q/q upward revision to the Q2 GDP horror show. Just the 0.6%q/q contraction then… What will the production statics look like in the next three months! Watch this space.
UK trade deficit reached a record high in June. Public holidays affected the trade data too. The UK’s trade deficit in goods and services increased by £1.6bn, to £4.3bn in June. This is a huge 43% higher than June last year and much bigger than expectations. Exports fell by £2.2bn or 8.4%m/m, largely due to the decline in exports of oil, chemicals and especially cars. Exports to the Eurozone fell by 7.1% and exports to Non-Eurozone countries fell 9.6%. This ends the party following May’s data which showed the first improvement in the trade balance in four months. With slowing global growth, these poor trade data only add to the Bank of England’s prediction that it will be a long hard road to recovery ahead. More troubles ahead!
Chinese industrial production and trade data disappointed in July. Chinese industrial output growth slowed to a three year low in July. It rose by 9.2%y/y, down from 9.5% y/y in June, against expectations of a rebound. This was disappointing enough, but Chinese trade data came in below expectations too. Exports increased by just 1%y/y in July, down from 11.3%y/y in June. Meanwhile imports rose by 4.7%y/y compared with 6.3%y/y in June. Lower exports show slowing global demand while lower imports show domestic demand is also ebbing. This is disappointing for UK exporters too, particularly as they struggle to rebalance towards exports to developing economies. China in rapid decline! See details below.
Chinese consumer inflation continues to fall. More evidence of weakening domestic demand in China came with the latest inflation data and retail sales data. Consumer prices increased by just 1.7%y/y compared with 2.2%y/y in June and 3% y/y in May. The dip brought the Chinese consumer inflation rate to a 30 month low. Retail sales fell too, but only from 13.7%y/y in May to 13.1%y/y. The good news is that falling inflation leaves the authorities some room to loosen policy and stimulate the economy again.
China Export Growth Collapses as World Recovery Slows
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Baltic Dry Index Claims World's Oldest Shipping Company
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Source: Baltic Dry Index (BDI)
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The Credit Crunch of AD 33 Repeats itself time and time again!
What with the Bank of England pushing £375+ billion and the USA Federal Reserve $1+ trillion into their countries respective banking systems, readers may be interested to learn of the following from `Banking & Business in the Roman World`;
In AD 33 the lack of cash continued to become increasingly serious (where have we read this before many times?). To remedy the situation, through the intermediary of `ad hoc` financial offices directed by Senators, the Emperor himself offered interest-free loans amounting to an overall sum of 100,000,000* sesterces from his personal fortune for the duration of three years. The borrowers were required to offer security in the form of real estate or buildings. In this way they were not forced to divest themselves of their patrimony in order to pay off their debts. Fides, that is to say confidence, returned, and the situation was retrieved for a short time.
The Roman Banking System
Naturally, the date is of exceptional interest to us. This was apparently one of four or five occasions during the 400 or so years of the Empire that Bankers had over lent a surplus of underpriced money i.e. `interest rates unrealistically low`, which produced a property price bubble and then started to call in their loans! Archaeological evidence exists for a Roman banking system which included things we now call cheques, direct debits and standing orders (although not available to the common person, just the well off citizens); soldiers received payslips with deductions for various items and tax collection was privatised, as we would say, through small private companies called `societaters publicanoriam` - hence our older versions refer to such as Matthew as `publicans`- which also doubled as the system by which State money was accounted for and transferred around the Empire.
From the information contained in the book one could suggest that Paul need not have carried a bag of money in taking the collection for the saints from Corinth to Jerusalem; he could have gone to the bank in Corinth and exchanged the cash collection for letters which would then be cashed when he arrived in Jerusalem - much safer. However, the scriptures do not tell us either way. Furthermore, a system of marine insurance/finance existed (known as both `pecunia nautica and pecunia traiecticia`, literally `money that travelled`) which answers the question of who could have paid for shipwrecks like the one Paul experienced.
Coming back to the `credit crunch` we know from Ecclesiates there is `nothing new under the sun`, but it is always interesting to see concrete examples of this. Apparently the Romans had a name for what we now call a `credit crunch`, when this happened in 216 BC it was known as `per inopiam argenti` - roughly translated, `the money isn`t working`!
* How much is 100 million sesterces! Establishing this with any accuracy is always difficult, but one can obtain an order of magnitude there were four sesterces to a denarlus, so it is twenty-five million denaril. We know that one denarius was roughly a day`s wage for the common person. If we take this now as about £100 or $200 then the amount in question is roughly US 5 Billion. Given the world population at that time was between 200 and 400 million, so say 300 million and now it is about 6 billion, or twenty times larger then on the basis of proportionality to population we are talking about US 100 billion.
Why do politicians/bankers/lenders ignore history? and yet history repeats itself several times because these people do not read! People need to read `The Rise and Fall of the Roman Empire` and then perhaps they will learn how to avoid repeating history.
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Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.
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Baltic Dry Index and the economy!