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SIMON BROWN: I’m chatting with Sanisha Pakirisamy, an economist at Momentum Investments. Sanisha, appreciate the time today. Trade disruptions. We know about the Red Sea issues with the Houthis – that’s world-widely understood – but there are other potential threats out there. We’ve got straits around Taiwan. We’ve got droughts potentially in the Panama Canal, and the …, up by Iran. We’ve seen trade disruptions, shipping route disruptions. This could get a whole lot worse over the course of the year.
SANISHA PAKIRISAMY: Thanks so much, Simon. Yes, I think the world is increasingly becoming worried about global maritime trade. And, as you point out, it’s not just the conflict in the Red Sea that has led to resurgence in freight prices in the ocean, but we’ve also seen that a number of other choke points that account for a big portion of global trade seem to be under sort of the hotspot banner, where we are starting to see things like drought affecting the Panama Canal. There’s potential conflict that could break out in other choke points that could also further dampen your global trade routes.
As a result of that we find that there could be implications for inflation further down the line, for things like oil prices further down the line. I think ultimately living in a world where there are more geopolitical pressures than we’ve seen in the past couple of decades, we are starting to get quite concerned about global trade volumes going forward.
SIMON BROWN: And obviously there’s a time issue to this; it just takes longer to get from A to B; container prices also then skyrocket. You had one which is the World Container Index, which is up almost double since late last year.
You mentioned inflation; looking at some of the forecasts there, in the US the core PCE [personal consumer expenditures] – and I know PCE is the preferred inflation for the Federal Reserve – that suddenly could be 2.4 this year, 2.2 next year. Does that take red caps off the table in a worst-case scenario?
SANISHA PAKIRISAMY: Well, if you look at that World Container Index what’s quite interesting about that chart is, if you had to look at it from sort of the beginning of last year, you’d see this very noticeable jump towards the end of last year, beginning of this year. Those rates are sitting at about $4 000. But more interestingly, if you had to take that chart a little bit further back and look what happened during the pandemic, you would have seen that that very same index actually went up to $10 000. So what is different this time around?
During the pandemic, what we saw playing out there was that global supply chains around the world were impacted by the fact that we had restrictions on movement. However, this time around it’s really specific choke points that are affected, and fortunately there is an alternative route for trafficking some of these container ships – and that’s through the Cape of Good Hope.
Now, unfortunately, the Cape of Good Hope is a bit further than the journey would’ve been normally, and that does add to things like insurance costs, it does add to time delays. And so we are still seeing in some areas – specifically electronics and motor-vehicle manufacturing – that there are some supply disruptions happening there.
As you point out, there can still be an impact coming through for inflation. I think this time around the inflationary impact is relatively subdued because we haven’t actually seen the international price of oil skyrocket, despite these geopolitical tensions breaking out in the Red Sea. Of course that remains, you know, quite a big risk to this view.
But at the moment it looks as though there could be an additional 0.4 percentage points added to core inflation for the United States by the end of this year. That is a forecast that comes through from the Fitch Ratings agency.
In terms of what that means for interest rates, I think that central banks across the globe have signalled to markets that they might be cutting interest rates a little later than the market has implied in terms of the pricing coming through there. I think that’s because central banks are still quite nervous that inflation may rear its ugly head again in an environment where you have big risks like the Red Sea conflict breaking out.
SIMON BROWN: I take your point, and that’s what central bankers do – rather be a little cautious than get too gung-ho. You make the point that so far the Houthis in the Red Sea aren’t attacking oil tankers. So the [dollar] oil price – it’s in the low eighties – is a little up in the year, but still not going anywhere. But this would potentially take some shine off GDP growth in a world [where] the debate a year ago was around a hard versus a soft landing.
It seems to have gone almost to a debate of no ‘landing’ whatsoever, but perhaps a lower GDP – particularly in China, which would potentially be sub-5% – which is what President Xi Jinping is targeting.
SANISHA PAKIRISAMY: That’s exactly the case. So we’ve seen this ‘hard versus soft landing’ debate go into a ‘soft versus no landing’ debate.
I think that this year we will see reasonable growth out of many of the major economies, but as the International Monetary Fund pointed out – together with the World Bank in fact – this year’s growth rates, even though they look reasonable, will still be significantly below the 10-year average that we saw prior to the pandemic.
So make no mistake, the fact that we’ve had the global pandemic taking place has had a negative impact on trend and potential growth throughout most of the major economies.
In China we find that we are still seeing quite a lot of pain along the consumer lines. Consumers in China still prefer to save rather than spend, and that means that household consumption spending is not able to take over slowing growth in exports or slowing growth on the manufacturing side.
Add to that, there are still significant property-sector woes playing out there. It is coming off quite a low base, so you may see some incremental improvement or less of a drag coming through from the property sector, but that means that we are probably going to see sub-5% levels for growth in China both this year and for next year.
SIMON BROWN: Okay. So not ideal, but maybe not the end of the world. But we’ll keep an eye on those different trade routes. As I said, the Red Sea we all knew about, but of course other things – like drought in Panama – just absolutely throw a spanner [in the works].
Sunisha Pakirisamy, economist at Momentum Investments, I always appreciate the insights.
