Do 'green shoots' in the economy mean the worst is over?

The game of spotting “green shoots” has begun in earnest as,
of course, it had to before the UK could claw its way out of the depths of
recession. Recently, probably the two most hyped green shoots were the various
Purchasing Managers Indices (PMIs) and the Baltic Dry Index.

The role of the PMI is widely known. The Baltic Dry Index, which measures
shipping rates, is less well known, but is regarded by many as hugely
significant as a long-term trend indicator. When there is a surplus of ships,
because exporters have fewer cargoes to ship around the world, rates plummet.
When there is more cargo than ships, rates soar.

Six-month guide
Because it takes eight weeks to ship dry cargo from China to Europe, and a
further eight weeks to do the round trip, plus a few weeks to arrange all this,
the Baltic Dry Index is held to be a reasonable predictor of the state of the
global economy in six months’ time.

In January, www.seekingalpha.com ran a chart of the Baltic Dry Index showing
that it had risen to 1,837 from around 1,500 in mid-December 2008. BDI followers
threw their hats into the air and celebrated the coming end of the recession.
Since then, however, the BDI’s performance has been rather confusing. By 8 April
it had fallen for 21 days in a row and was back to around 1,490.

But a couple of the individual ship category indices have risen. The Capesize
index is above 1,990, a good bounce off its bottom value in December 2008. This
index tracks ships that used to be too big to go through the Suez Canal and had
to go round the Cape (hence the rubric). Apparently, Chinese demand for Capesize
ships is soaring again as the authorities try to buy up as much cheap iron ore
as possible. That is good news longer term, since Chinese growth is regarded as
a fundamental driver of world growth.

If this was all there was, there wouldn’t be much for the green shoots to
feed on. But there are other signs and portents of recovery. According to BDO
Stoy Hayward’s High Street Sales Tracker, retail sales bounced back in March,
entering positive territory for only the third time in the last 12 months as
like-for-like sales edged up by 1.3%.

Could be worse
Also positive, in a back-handed sort of way, is the Bellwether survey published
on 6 April by the Institute of Practitioners in Advertising (IPA). “The bottom
has been reached for drops in UK marketing spend and business confidence started
to return in the first quarter of 2009,” the IPA said. However, it added that in
2009 Q1, its members had suffered “the second-steepest budget cuts in the
nine-year history of the survey.”

The main reason for IPA’s optimistic spin is that it indicates a “slowing
rate of decline”. Unlike executives jumping from tall buildings, falling
economies slow their descent perceptibly before they bounce. So a number of
“green shoots” stories tend to be about things continuing to get bad, but less
rapidly.

A classic in this vein is the upbeat research note on real estate from Nomura
analyst, Mike Prew. “It appears that real estate’s devaluation is moderating and
investment turnover is picking up,” he said. This isn’t as much fun as saying
that property values are soaring ­ they’re not, they’re continuing to tank ­ but
it’s still good news… isn’t it?