Downgrades for EU and Chinese growth will have a direct impact on demand for China-Europe freight services, say experts.
Declining economic growth rates in China and the European Union will stifle growth in air and ocean trades this year, according to leading modal analysts.
Earlier this week, the IMF’s latest World Economic Outlook (WEO) report reduced its world GDP expansion outlook for 2019 to 3.5%, down from the 3.7% forecast in its October report, with economic headwinds in Europe and China cited as key factors. The IMF also reduced its 2020 global growth outlook from 3.7% to 3.6%.
The downgraded forecasts for European and Chinese economic expansion are, if proven accurate, expected to have a major impact on demand on the Asia-Europe trade lanes so critical to air and ocean freight stakeholders.
“When you consider that, between them, Greater China − 31% in 2018 − and Europe − 17% in 2018 − are responsible for nearly half the world’s port container throughput, any slowdown will have a significant impact on the total,” said Simon Heaney, senior manager for container research at Drewry and editor of the company’s Container Forecaster report.
“We had foreseen a slowdown in Europe in 2019, but the China situation is more surprising and potentially more damaging. We’ll do a proper impact assessment asap.”
BIMCO’s chief shipping analyst Peter Sand said the macroeconomic outlook was continuing to deteriorate and lines would need to take strong action to protect bottom-line performance. “We had already expected Europe to slow down in 2019, sliding further from the peak in Q4 2017, but naturally this is a further souring of that outlook,” he told Lloyd’s Loading List.
“Container shipping needs strong growth on Far East-Europe services − the liner fleets have been set up for just that over the past 7-8 years.”
Sand said the “slim improvements” made on the Far East to Europe fronthaul trade were already being eaten away early in 2019. “Massive blanking of service heading towards Chinese New Year is another clear indication of those troubles,” he said. “Forget about the backhaul − that’s no more than repositioning while trying to reduce cost as much as possible.
“The slowdown in China could affect also Intra-Asia somewhat. But North America and Europe remain the key drivers of the container shipping market.”
Peter Stallion, air cargo derivatives broker at Freight Investor Services, told Lloyd’s Loading List that the slowdown of Chinese GDP growth would most likely impact export growth rather than prompt a reduction in current overall volumes. “I wouldn’t forecast any significant reduction of cargo volumes, but perhaps a corresponding slowdown in export growth,” he said.
“We’ve heard from certain sides of the market that there is more of a concern − or opportunity depending on your market position − regarding the reversal of traditional trade lanes, given the growth in Chinese consumerism. So, a slowing of export growth in China this year could be balanced by more high-value imports from the US and Europe.
“This makes it crucially important for freight forwarders and airlines to consider physical market exposure and risk to changes in prices, particularly when entering into block space agreements.”
According to the IMF, the China-US tariff war, a deep economic contraction in Turkey and uncertainty surrounding Brexit were all bearish factors in its latest forecast downgrades for global economic growth. On Monday, China reported its weakest annual growth since 1990 at 6.6% for 2018, and the IMF is now forecasting China’s growth rate to slip to just 6.2% this year and in 2020.
It said the Eurozone had been negatively impacted by the introduction of new automobile fuel emission standards, which had hurt Germany. In Italy, concerns about sovereign and financial risks had weighed on domestic demand, while the contraction in Turkey is now projected to be deeper than anticipated.
“Risks to global growth tilt to the downside,” said its latest report. “An escalation of trade tensions beyond those already incorporated in the forecast remains a key source of risk to the outlook.
“A range of triggers beyond escalating trade tensions could spark a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt. These potential triggers include a ‘no-deal’ withdrawal of the United Kingdom from the European Union and a greater-than-envisaged slowdown in China.”
Source: Lloyd’s
