Europe's woes are showing early signs of stalling the recovery of global trade.
The Baltic Dry Index, a measure of global shipping that is followed closely by economists, is suddenly raising red flags over the pace of the economic rebound. The reading released daily by the Baltic Exchange has been sinking every trading day for the past three weeks, measuring a 34-per-cent drop in ocean freight rates and foreshadowing a slowdown in trade.
The index declined 3.8 per cent Thursday to 2,784 points, reflecting the slump in the shipping industry's prices to transport dry raw materials over 26 global routes. Economists watch the index because the amount of raw materials being shipped - from coal to grain to iron ore - provides a key indicator of consumption and manufacturing trends.
Government stimulus packages have sparked a strong global recovery since mid-2009, but the comeback appears to be running out of steam, said Stuart Bergman, director of economics for Export Development Canada.
"It's easy to grow from a low base," Mr. Bergman said in an interview from Ottawa. "This maturing of the public stimulus is happening now, and we expect to see slower growth in the second half of this year. The Baltic Dry Index's drop is indicating that the global economy isn't really ready yet to stand on its own two feet."
The index remains a far cry from its record high of 11,793 points in May, 2008, but is above its 22-year low of 663 points in December, 2008.
The last time the index staged a daily gain was May 26. "It stands to reason that the decline that we've seen over recent weeks is a reasonable signal that the pace of economic activity has flipped," said Nick Chamie, global head of emerging markets research at RBC Dominion Securities Inc.
Europe's debt crisis has triggered fiscal tightening that economists fear will slow the region's economic growth, in turn slowing imports from Asia and other countries and subsequently the pace of global growth. Europe's troubles haven't yet had an impact on demand for Asian goods, as China recently reported that its exports surged 48.5 per cent in May from a year earlier.
Maersk, Europe's largest shipping line, cautioned Thursday that it's facing a shortage of containers needed to move consumer goods during the peak summer season, for instance.
But it may be too soon for Europe's slowing growth to start showing up in global trade numbers. Mr. Chamie cautioned that "trade data does come out with a lag. It will take time for the tighter financial conditions in Europe to eventually feed through to consumer spending patterns and affect imports from Asia."
Mr. Chamie has been tracking the emerging markets' purchasing managers index (PMI), an indicator of economic activity. Brazil, China, South Korea and Poland may have seen their PMIs peak earlier this year, with momentum slowing in recent months.
"Not everything happens in real time like in financial markets. It could take weeks if not months for the deceleration in global growth to show up in other economic data," Mr. Chamie said.
Ship brokerage Compass Maritime Services LLC noted that in China, demand is tumbling for construction steel "due to the government's attempt to rein in the housing market on inflation fears." Iron ore is used in steel production.
Longer term, there is optimism that orders will be healthy for building new vessels at shipyards in China and South Korea, said H. Clarkson & Co. Ltd., a shipping services firm.
The Baltic Dry Index's roots can be traced to Britain in 1744 and a London coffeehouse called the Virginia and Baltick, whose patrons were in the shipping business and would draw up deals there.