Prospects for a continuing solid recovery in global economic activity have faded over the past few months.After an initial rebound from a devastating downturn in world output and trade in 2008/09, there were high hopes of further steady progress. But the sovereign debt crisis intervened, and the outlook now is much less promising.
Lowered expectations for industrial output in a wide range of countries, amid restrained demand for the products, implies adverse effects on imports of many dry bulk commodities. Attention immediately focuses on the steel industry which, because of its vast size and raw materials purchases, has an enormous impact upon suppliers, shipowners and port operators. Numerous other bulk trade flows could be affected by a slowing world economy as well.
 
MUDDLING THROUGH
Some dire warnings have been expressed, especially for the advanced group of countries within the OECD area, comprising mainly Europe, USA, Japan and South Korea. In comments accompanying the OECD secretariat’s latest half-yearly forecasts published at the end of November, the deteriorating trend of global economic activity was emphasized.
These forecasts, key elements of which are summarized in the table below, show gross domestic product (GDP) growth in the area as a whole slowing from an acceptable 3.1% in 2010, to an estimated 1.9% in 2011 and weakening further to only 1.6% in 2012. Despite expectations of improving momentum in the USA this year, and a post-disaster rebound in Japan, the group is likely to be weighed down by a very weak European Union.
Events in recent weeks have reinforced the message. The IMF in mid-December warned of 1930s-style threats: the world economy faces “economic retraction, rising protectionism, isolation”. However, while this assessment is undeniably a bleak outlook, there is a high degree of uncertainty surrounding predictions.
The OECD’s report emphasizes a more uncertain than usual global economic outlook, especially regarding the eurozone debt crisis and its possible impact. Consequently the organization’s GDP forecasts are based on what it describes as a “muddling through” process, where there is a mild recession in Europe, after which a soft and gradual recovery ensues within the whole group.
 
SUPPORTIVE EMERGING ECONOMIES
One crucially important aspect of the economic outlook is the
relatively firm trend among emerging economies, including China and India, forecasts for which are also shown in the table. Although these economies will not be entirely insulated from adverse events elsewhere, their growth prospects currently are still quite favourable.
Potential for a worse outcome is apparent, particularly if advanced countries experience a more severe setback than currently projected. But based on a cautiously positive view, China, India, and a number of other emerging economies may see only limited further slowing over the next twelve months. This expectation implies a generally supportive trend for imports of dry bulk commodities into these countries.
Nevertheless, there is anxiety about patterns of economic activity in China. Growth slowed in 2011 from the strong 10.4% GDP increase seen in the previous year, amid tightening monetary policy — higher interest rates and restricted credit for the private sector slowed investment in housing, and foreign trade weakened. During this year the results of easing monetary and fiscal policy could ensure that China achieves about 8.5% expansion.
 
STEEL RAW MATERIALS IMPACT
Back in October last year, before the full severity of damaging events in Europe became clearer, the World Steel Association outlined a cautiously optimistic view of the steel industry’s future progress. It was suggested that global demand for steel in 2012 probably would slow only moderately from an estimated 6.5% growth in 2011, to 5.4%.
In the European Union, a much sharper slowing from 7% growth last year, to 2.5% in 2012 was envisaged. By contrast in Asia (no separate forecast for Japan was given), only a modest deceleration from 6.2%, to 5.4% was predicted. Within this group, China’s steel demand expansion seemed likely to slacken from 7.5%, to 6%. However, a few months later, these expectations are looking hard to achieve.
China’s steel output has been declining, after reaching a monthly peak of 60.2mt (million tonnes) in May 2011, falling to just below 50mt in November. While not conclusive evidence of prolonged weakness it does, together with other signs, point to a trend of slowing domestic steel demand. But the impact on iron ore imports (comprising over 60% of global seaborne trade in this commodity) has been muted so far.
In Japan, a boost for steel demand and production in the
aftermath of last spring’s earthquake and tsunami, as reconstruction work progresses, has been slow to gain momentum. In the meantime, slackening demand in key foreign markets for direct exports of steel products has emerged. For the immediate future, the steel production outlook seems fairly flat.
Expectations of a continued upwards trend in Europe’s steel output and raw materials imports during 2012 are becoming less convincing. Although recently there have been some indications of resilience in Germany’s economic activity, the outlook for the remainder of the EU suggests pronounced weakness. Consequently, European domestic steel usage may struggle to remain flat this year, and the possibility of an actual decline in demand and production is becoming more plausible.
 
Richard Scott