Shipping demand is governed by global production levels but also by shipping's own productivity. The latter is endangered by the energy transition.
(Illustration by WIX AI)
Shipping demand is driven by global GDP growth. If you want to increase shipping demand, increase global output. That can be done by increasing population or increasing productivity – preferably both. In some economies, like the UK, productivity growth is negligible because the economy is almost entirely given over to inherently low-productivity activities such as tourism, hospitality, health and care. It’s hard to serve coffees faster than people want them, or bed bath pensioners faster than care workers already do. And in any event, these activities barely register on raw materials or manufactured goods imports which is what really drives shipping demand.
For my own satisfaction, and possibly yours, I did a quick survey of productivity trends in some of the major economic zones.
1. United States (US)
Historically, the US enjoyed high productivity growth, especially after World War II and during the tech boom of the 1990s. Productivity growth has slowed in recent years, particularly after the 2008 financial crisis. From the 2010s onward, US productivity growth has been modest, partly due to slower technological advancements and diminishing returns on capital investments. From 2010 to 2023, the US saw fluctuations in labour productivity growth, with notable slowdowns around 2015-2016 and again during the COVID-19 pandemic. The COVID-19 pandemic led to a brief surge in productivity due to accelerated digital adoption, but it remains to be seen if this will be sustained. Annual productivity growth averages about 1-2% per year, with stronger growth in the early 2010s and a slowdown post-2015.
Overall productivity has remained relatively high compared to other regions, with GDP per hour worked steadily increasing. There are suggestions that productivity growth in the US is being driven not by the big tech leviathans on the stock exchanges but by small company start-up rates which, at 5.5 million in 2023, were at a record high, and were 57% higher than in 2019. The goal is to reach unicorn status (a valuation of USD 1 Bn or more). If a company has a one in million chance of achieving that, then five of the 2023 start-ups will get there.
2. China
China experienced explosive productivity growth since the late 1970s, coinciding with economic reforms and opening up to global trade. The shift from an agrarian economy to a more industrial and service-oriented economy has driven this growth. China's productivity growth has been substantial, reflecting its rapid industrialization and modernization. However, growth rates have slowed down from the double digits in the early 2010s to around 5-7% annually more recently, as the economy transitions from manufacturing-led growth to services and consumption-driven growth.
However, this growth depended in large part on foreign direct investment. FDI to China peaked at USD 105.2 Bn in Q4 2014, dipped to a low of USD 21.1 in Q2 2017, rallied to USD 101.3 in Q1 2022 then slumped to USD -11.8 in Q3 2023, going negative for the first time since modern records began in 1998. FDI then recovered to USD 17.8 Bn in Q4 last year. In Q1 this year, it was USD 10.3 Bn – seasonally affected by the annual lunar slow-down.
In recent years, China's productivity growth has slowed as the economy matures and faces challenges like an aging population (a fall of 2 million in 2023), trade tensions, and the need to shift towards more sustainable growth models. China continues to invest heavily in technology and infrastructure, which could support future productivity gains. But as I’ve written in several Macro Macchiato reports, and at length in several of our Markets Monthly reports, there seems to be an inverse relationship between the increase in rhetoric from Beijing urging the Chinese to be more productive, and actual productivity growth, especially as company formation and the private sector are moribund under Xi’s micro-management of business via the Party.
3. Japan
Japan experienced rapid productivity growth during the 1950s to the 1980s, often referred to as the "Japanese economic miracle." However, since the 1990s, Japan has faced a prolonged period of stagnation, known as the "Lost Decades." Japan's productivity growth remains low compared to other advanced economies, partly due to an aging and shrinking population, rigid labour markets, and deflationary pressures. Annual productivity growth has been under 1% for decades. Japanese workers produced USD 52.3 per hour in 2022 basis OECD data, resulting in Japan’s lowest ranking in global productivity since 1970, when comparable data first became available.
Nonetheless, Japan has been making efforts to boost productivity through technological innovation and structural reforms. The government used to work on the principle that productivity growth would rise, taking wages up with it. But due to a labour shortage including “labour shortage bankruptcy” company failures, the government has begun to re-think this order and is encouraging wage increases to reduce labour shortages, then companies “can shift to more profitable endeavours.” As wages have increased, the return of inflation this year led the BoJ to raise rates unexpectedly at the end of July, leading to the carry-trade bump in global stock markets.
Japan is conducting a macro-economic experiment in real time. Without immigration to bolster its workforce, and with limited technological investment, it is hoping that paying people more will attract talent to the most future-proof economic activities.
4. ASEAN (Association of Southeast Asian Nations)
ASEAN countries have generally seen strong productivity growth over the past few decades, driven by industrialization, foreign direct investment, and improvements in education and infrastructure. However, the pace of growth varies significantly between countries. Labour output in Singapore is $176k a year, in Malaysia USD 61k a year, in Thailand USD 33k a year and in Indonesia it is $28 k a year (data from the 2023 Asian Productivity Organization Yearbook).
The region has averaged around 2-5% annual productivity growth, driven by a mix of industrialization and increasing foreign investment. Productivity growth has been challenged by inequality, reliance on low-cost labour, and varying levels of technological adoption. Countries like Singapore and Malaysia tend to have higher productivity levels, while others like Myanmar and Laos lag behind.
In Indonesia, a total of 17 national holidays plus 10 so-called collective leave days
– the days after a religious holiday – gives citizens 27 days off before paid or unpaid leave from work. The Manpower Ministry suggested this year that “too many holidays have taken a toll on Indonesian worker labor productivity” as the Jakarta Globe newspaper put it in a 30 May article.
5. European Union (EU)
The EU's productivity growth has been modest, averaging about 1% annually. Productivity growth varies across EU member states. Northern and Western European countries, such as Germany and the Netherlands, have traditionally had strong productivity, while Southern and Eastern European countries have lagged. The EU faces challenges from aging populations, economic disparities between member states, and political issues like Brexit. It has also faced the challenge of replacing cheap Russian energy with more expensive imports from elsewhere. Energy suppliers in the Mid East and the US have benefited most from the war in Ukraine. EU industry has struggled with higher costs with some significant disruption. For instance, German chemical giant BASF closed some of its German production and invested USD 780 Bn in new plant in Louisiana to access cheap US natural gas.
There have been efforts to boost productivity through digitalization, green energy transitions, and increased investment in innovation. I will come back to the energy transition after the regional survey.
The chart below comes from the OECD; it shows that some EU countries enjoy extremely high productivity, though the data is skewed to some extent by financialization. A high dependence on financial services does little for physical demand for imports and exports, so such data has little direct impact on the shipping industry. In other words, don’t rely on Dublin to generate much in the way of oil, gas, iron ore or containerised shipping activity.
Observations
Technological Innovation is a key driver across all regions, with countries investing in digital infrastructure and automation seeing better productivity outcomes.
Aging populations in Japan and parts of the EU have negatively impacted productivity, while younger workforces in ASEAN contribute positively. Immigration can impact productivity positively, but it depends on the kind of immigration. It goes without saying that immigrants have to be economically active and that they should bring skills that host labour markets lack. In Europe and the US, immigration has become a political bin fire as arguments rage about the status of immigrants and their contributions. A lack of data helps neither side in the debate which turned violent during the UK’s traditional Summer riot season this year.
Government policies, particularly in terms of education, labor markets, and innovation, have a significant influence on productivity trends. In many nations, governments are more focused on taxation, borders and energy independence. These might win votes or approbation but are tangential to the real issues.
Under innovation we might include the energy transition. The chief challenge to productivity is that, while electrification of stationary activities can make them more productive as well as less pollutive, the transition from mineral oil based transport fuels to alternatives necessitates, under the best technologies currently available, a reduction in productivity. Higher costs might come down with economies of scale. But the energy density of different molecules is set by the laws of physics and chemistry and cannot be improved.
This gives shipping a long-term dilemma. The IMO's ambitions for a reduction in GHG output from shipping are most easily met by slowing down ships, then by using fuels which are inherently less energy dense than oil, necessitating more refuelling stops, bigger bunker tanks (and thus less cargo space) or shorter voyages. These solutions all lead to lower productivity.
If shipping is not to be a drag on global productivity growth, it needs access to a higher-productivity energy source than oil. If shipping cannot find that, then its customers might begin to look elsewhere for productivity gains. The easiest solution is to re-site production closer to consumers – and do less shipping.
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