With 90% of traded goods being carried by ships, it is no wonder then that on Monday Maersk announced that it would be taking steps to slow down operations following a fall in consumer demand. So, why has demand fallen so dramatically, and how could this impact the wider economy?
Firstly, there is no doubt that the Russian invasion of Ukraine is playing a leading role in disturbing the global economy. The invasion led to worldwide disruptions in trade, food and oil prices, having a direct impact on inflation. The impacts of this are being felt globally with concerns over food shortages rising. For example, there have been stark warnings over butter shortages in the US, meanwhile, European farmers are warning of food shortages this Christmas. In order to bring down prices, federal banks have been tightening their wallets, by increasing interest rates to discourage spending and curb inflationary pressures.
Meanwhile, the impacts of high oil prices are already having effects on the shipping industry. Most critically, it is increasing the cost of moving goods from one place to another. The Ukraine war raised the price of energy by 78% in August which means that the cost of running and sailing ships is skyrocketing. These higher production costs then translate into higher costs for goods. Subsequently, these elevated costs are then translated into even higher prices for consumers which acts as another disincentive to spend more on unnecessary goods. As a result of these high prices and policies to disincentivize spending, demand is now taking a battering.
Overall, this has led to a slowing of the global economy both in terms of consumption and business. In August, JP Morgan outlined that their Global Manufacturing purchasing manager’s index, a measurement of purchases made by managers from 13,500 companies in 40 different countries, had fallen to a 26-month-low of 50.3. This figure is just higher than the 50 that shows a sector is growing, highlighting the very real impacts of increased prices on businesses.
There are many potential impacts that this fall in demand could have on the industry as well as the wider economy. Notably, Maersk, one of the world’s biggest shipping companies, have started to slow down the pace of their ships. As the company prepares for reduced freight volumes this year, the move is an attempt to lower fuel costs for the firm and maintain “fuel efficiency.” In a Reuter interview, the company’s CEO, Soren Skou, said that the main reasons for the firm taking such action is because of the fall in demand from US consumers and a fall in confidence following the Russian invasion of Ukraine. Although the company is expecting a “modest” rise in trade around the Christmas holidays, this is expected to be lower than usual.
It is clear that shipping has taken a hit from Russia’s invasion both in terms of their supply-side costs, through the rise in the cost of fuel, and its knock-on effects on demand. Although it is too early to call all the impacts that this fall on demand may have, it is clear from the actions of Maersk that some of the effects are already being felt.
Photo: Lucy Nicholson | Reuters