Demand resilient, but container shipping faces longer-term risks

Global container trade will shrink in 2020 for the first time since 2009 and one of the few times in the industry’s 65-year history. But it will be a slighter contraction than many feared or expected given the Covid-19 backdrop - in the range of 3-5% year-on-year. What lessons can be drawn from the performance of container trade this year, and what do these imply for the strength of trade moving forward?

The first lesson is that demand for key groups of containerised products has proven broadly resilient to life under the pandemic and certainly so outside the most stringent periods of lockdown. US containerised imports of electronics from Asia actually increased by 9% year-on-year in H1 2020, and since the end of lockdown, imports across nearly all product categories have surged. Furniture imports in particular have risen following a rapid rebound in the housing market.

The US is an outlier in terms of the strength of its rebound in imports, but the lifestyle and workplace changes caused by the pandemic have so far proven compatible with healthy consumption of containerised goods. This activity is now likely to slow as restrictions on mobility and economic activity are once again tightened and once an initial process of restocking has played out. But the industry can take some comfort from the precise ways the pandemic has affected demand for goods transported in containers.

This also points to a second lesson: the need to look beyond GDP. Outside of backhaul, niche or reefer-heavy trades, GDP is usually a fair barometer of the health of container demand. But this year this relationship has broken down.

In previous recessions, the key economic culprits have been fixed investment, housing, capital goods, industrial production and inventories. All of these are goods-intensive sectors.

Expenditure on services, conversely, is historically far more stable during periods of economic downturn.

In 2020, all this changed; the record-breaking economic contractions witnessed in Q2 2020 were overwhelmingly driven by reduced expenditure on services, while spending on goods fell by a far lesser amount in the US and major European economies.

There is a need to look at individual industries and higher-frequency variables, and consider the interaction between inventory levels, changed patterns of consumer demand, evolving containment measures and the purchasing power of consumer and corporate purses.

This final point, related to incomes, will be of critical importance moving ahead. While Covid-19 has scrambled statistics and the normal relationship between economic variables, one foundational macroeconomic relationship remains intact: one person’s expenditure is another person’s income.

Earlier in the crisis, massive government support of incomes and employment effectively made this problem disappear. Despite a 9.7% year-on-year fall in personal consumption expenditures in the US in Q2 2020, total personal incomes grew by 10.4% year-on-year. This undoubtedly helped support a post-lockdown spike in consumer spending on goods which outpaced even importers’ attempts to rebuild inventories.

In many advanced economies, however, policy support is now less generous and unlikely to return to former levels of largesse. This is where the industry should be concerned about the ongoing suppression of expenditure in service industries, which provide over 70% of total employment in OECD economies. If the shock to business revenues is not offset by government support, this will drive joblessness and business closures up and disposable incomes down.

How far this will impact container trade will, unsurprisingly, depend on how far into 2021 the world must wait for a vaccine or treatment. If this arrives later in 2021, pressure on container demand will build over H1 2021. Renewed lockdowns in Q4 2020 could potentially drive a renewed round of restocking in Q1 2021, but thereafter the industry will be navigating stormier waters.

The experience of the pandemic so far has provided key reasons for optimism around container demand resilience, but the longer the crisis rolls on, the more that risk will increase.