The global economy seems to be grinding on remorselessly towards a new era of stagflation, with prices rising but growth stalling, leading to conditions not seen last since the troubled era of the 1970s.

There are various reasons underlying this trend, including the Covid pandemic,  and its huge fiscal and monetary response around the world; ensuing higher demand and tighter labour markets; and Russia’s invasion of Ukraine adding a further shock to key commodity markets like oil and gas, agriculture and food.

However, how is all this playing out in terms of global trade and the not insignificant role of the air freight sector in facilitating it?

Many economists believe Europe may already be in recession, with the added risk of Russia pulling the plug on the supply of gas to Germany hanging like a sword of Damocles over prospects for the whole region.

Recent surveys in the United States, such as the widely followed Atlanta Fed GDP Now Forecast, are pointing towards a sharp slowdown there as well.

Meanwhile, growth in China – in recent years the main engine room of global growth – was squeezed down to just +0.4% in the second quarter following severe local lockdowns in key economic centres like Shanghai. 

Although global growth is clearly weak and falling, which may normally ease inflationary pressures, economists worry that this time inflation may be more sticky – given tighter labour markets in the developed world post-Covid. That gives workers more leverage to press for higher wages, which then threatens a wage-price spiral.

Although global growth is clearly weak and falling, which may normally ease inflationary pressures, economists worry that this time inflation may be more sticky – given tighter labour markets in the developed world post-Covid. That gives workers more leverage to press for higher wages, which then threatens a wage-price spiral.

There are other reasons as well, such as the trend away from ‘just in time’ towards ‘just in case’ supply systems, after the shock of the pandemic and subsequent scramble for PPE and vaccines demonstrated how important it is for countries to secure supplies of ‘strategic’ goods.

‘Just in case’ may be a safer approach to maintaining supplies, but it is usually more expensive.

Arguably, the biggest factor in the growth of free trade and low inflation in the last 40 years was the opening up of China to the West.

However, the expansion of global trade that sparked off began to run out of steam and head in reverse after the global financial crisis of 2008 – a new trend that has accelerated since Covid and the war in Ukraine. Some are already calling this a new era of ‘deglobalisation’.

There are also medium to longer-term demographic trends in China that point towards a slowdown there from the high growth rates of recent decades. Instead of exporting deflationary pressure, some expect China could soon be exporting inflationary pressure.

Hence the troubling outlook for stagflation. Economists and money managers do not agree about whether it will lead to a big recession, with some arguing that it may be just a shallow or ‘technical recession’ given the high levels of savings built up during the pandemic. However, the outlook does not look great.

Arguably, all these big geopolitical and macroeconomic trends are already reflected in the weekly data on air freight prices published by Baltic Airfreight Index (BAI). 

After rising sharply during 2020 and 2021, global air freight prices have eased off this year, according to the BAI data, with the overall Baltic Air Freight Index (BAI00) up just+15.6% year-on-year through 1 August against the backdrop of much higher jet fuel prices, which were up more than +85% year-on-year, according to Platt’s data.

After rising sharply during 2020 and 2021, global air freight prices have eased off this year, according to the BAI data, with the overall Baltic Air Freight Index (BAI00) up just+15.6% year-on-year through 1 August against the backdrop of much higher jet fuel prices, which were up more than +85% year-on-year, according to Platt’s data.

The BAI data for routes between specific regions look even more interesting.

For instance, the index number for Shanghai to US (BAI84) overall was down -7.2% year-on-year – while Chicago to Southeast Asia (BAI53)  was up +79.4% over the same period.

Does that reflect a shortening of US supply chains, as well asmovement of production for the US market away from China either into the US or to other locations? What about rising demand from China for key inputs from the US? Perhaps time will tell.

At the same time, air freight prices between China and Europe have been rising strongly in both directions: Shanghai to Europe (BAI81) up +41.4% year-on-year, while rates for Baltic Air Freight Index (BAI23) Frankfurt to China saw an even more eye-popping increase of +95.9% year-on-year.

Alongside the US to China numbers, perhaps the surge from Frankfurt reflects some latent growth in the Chinese economy, waiting to be unleashed after key inputs for the economy are urgently imported by air from Germany.

After a ‘summer lull’, the peak season for air cargo is anticipated soon and will be a key indicator of how much real growth in trade might offset those dark forces of stagflation.

Neil Wilson, TAC Editor