Measure Global Growth with the Baltic Dry Index

Using the BDI to Gauge International Economic Growth

Getty Images / Thierry Dosogne.

There are many different ways to measure global economic growth, including gross domestic product (“GDP”), consumer spending, and other key economic indicators. While these metrics are great for gaining insights into individual economies, investors looking for a global picture may want to take a look at other types of aggregate indicators like the Baltic Dry Index ("BDI"), which has become an important way to measure globalization and trade around the world.

In this article, we’ll take a look at the Baltic Dry Index and how it can be used as a leading indicator to measure and predict global economic growth.

What is the Baltic Dry Index?

The Baltic Dry Index - or BDI for short - is a shipping and trade index created by the London-based Baltic Exchange. By directly contacting shipping brokers, the exchange provides an accurate measure of the costs associated with transporting raw materials like grains, metals, and fossil fuels. The headline BDI reading is a composite of three sub-indexes covering the major classes of ships that are divided up based on their size - Capsize, Supramax, and Panamax.

International investors can find the latest BDI readings on the Baltic Exchange’s website, www.balticexchange.com, or through data aggregators like www.tradingeconomics.com. In general, investors watch for changes over time rather than specific readings in order to gain the great insights into where the global economy is headed.

A rising headline BDI figure suggests gains in the global economy and future prospects, while the opposite is true for a falling headline BDI figure.

Measuring Economic Growth

The Baltic Dry Index provides tremendous insight into global supply and demand economics, since a significant amount of trade occurs through the ocean.

Often times, changes in headline BDI figures serve as great leading indicators for global economic growth rates. This happens because the products being shipped are usually raw materials used in production - including metals or fossil fuels - and changes in raw material supply occur ahead of finished goods shipments.

International investors should keep in mind that the BDI is a volatile indicator given the tight supply of vessels and the long lead time for increasing or decreasing the supply of vessels. In general, these dynamics mean the index may not be entirely useful during times when supply or demand rises or falls sharply. The BDI is best used alongside other economic indicators in order to gain a paint a broad picture of what’s happening in the global economy rather than relying on it exclusively.

Other Important Considerations

International investors should remember that the Baltic Dry Index isn’t a guaranteed measure of global economic growth. As mentioned above, the index tends to be very volatile given the tight supply of vessels and the long lead times to create new vessels. Investors should keep these factors in mind when using the index and look for confirmations in other economic indicators like GDP, consumer spending, and other domestic indicators that provide an indication of growth and potential.

Aside from these limitations, investors should keep in mind that the BDI is largely a measure of international growth rather than growth for a specific country. Countries specializing in the export of goods for growth - such as China - may be more sensitive to the indicator than countries that rely largely on domestic services for growth - such as the United States, which means that investors should carefully consider how the BDI will affect their international rather than domestic portfolio.

Key Points to Remember

  • The Baltic Dry Index (“BDI”) is a shipping and trade index that measures the movement of goods around the world, including metals and fossil fuels.
  • International investors can use the BDI as a leading indicator of global economic growth, since it measures raw material purchasing at the source.
  • International investors should keep in mind the limitations of the BDI and take the necessary precautions to confirm the trends.