22 Sep 2010
The logistics industry tends to feel tremors or even major movements in the economy first when it comes to consumer spending and manufacturing output.
As an industry the logistics sector has faced its share of trials and tribulations over the last few years and with the recent news of the potential addition of a new aviation tax, this doesnít appear to be anything that is going to change in the immediate future. This, alongside the growth of the trade deficit to £3.8bn in May in goods and services, and the rise of exports by less than £0.1bn, compared to the rise of imports by £0.7bn indicates that we have a long way to go to change the economic business model towards a balanced economy that does not just rely on the service and finance sectors.
The logistics industry tends to feel tremors or even major movements in the economy first when it comes to consumer spending and manufacturing output. This may be because it has a real handle on exports versus imports or the fact that the industry is the first to feel the effects of consumer and retail spending due to demand swiftly feeding through to the movement of goods. Currently exports are a particular concern, with the potential of a knock-on effect of lower exports and greater imports leading to another unhealthy shift into negative figures for the UK economy. We have seen a drop in volumes in June which reflects the factory output statistics recently issued where we saw a 0.4 percent drop over the previous year. This again shows the trend value of airfreight against government statistics and how airfreight could potentially be used more as a quick barometer for the economy on certain statistical topics and audit checks.
The international transport industry
In terms of how logistics and the economy can be related, the international transport industry first needs to be split into two – these being airfreight and oceanfreight.
The airfreight market is the first market to decline in a recession and has the highest spend ratio area to the landed value of products exported or imported. During recessions, the financial situation for companies means that airfreight costs are the first to be cut in a bid to reduce supply chain costs, which naturally has a positive effect on your operating costs in the short term.
In the first four months of 2010 Hellmann has seen a surge in import airfreight and export airfreight and I believe this is a reflection on the industry as a whole. In June, however, we saw a softening in tonnages, especially in exports, which is indicative of the recent factory output results and a slight reduction in UK production levels, hence supporting the argument that transportation activity can be used as a barometer for the economy. Airlines have also reported lower aircraft utilisation (reduced Cargo) than previous months on exports which suggests activity is slowing down in some regions of the world.
TEU (Seafreight containers) volume movements
Oceanfreight, on the other hand, is a different story. This is where commodity volumes come into play. The Lines have made very heavy losses in the last couple of years due to asset costs versus revenue and the general market so they have created a market that has lower capacity through parking ships and have raised the cost of transportation through capacity shortages. This had to happen due to the economic situation they found themselves in. The seafreight market is above last year’s TEU volume movements and again shows the market in the UK has picked up since the beginning of the year.
Airfreight is the first product to see the negatives and positives of the market as it is the fastest form of transportation. The question for us all is, if the airfreight market softens first, like it has done on exports in June and July, will the oceanfreight market follow? This is yet to be seen this year. Another question is whether this is a reflection of the confidence of manufacturing companies or just the general uncertainty in the world markets.
Factory order growth
In order to look into this accurately, factory order growth must be considered. In China especially, a powerhouse in terms of manufacturing, a slowing down in the pace of growth in factory activity has been recorded. The general picture of growing weakness in China was broadly supported by the official index, which reported falls in the sub indices for new export orders, backlogs of work, imports and employment which is, according to China’s National Bureau of Statistics, reflective of the impact of tighter government policies and a weakening of the global recovery.
The UK is in similar turmoil, with orders at Britain’s factories falling to the lowest level in almost 17 years according to The Telegraph. The fact that the trade deficit has continued to grow despite the weak state of the pound is concerning due to recent increases in the value of it compared to the US dollar and euro – this mirrors the decline in demand for UK goods abroad.
GDP data follows a similar trend. GDP grew by 0.2 percent between January and March this year, the last quarter of 2009 saw GDP growth of 0.4 percent, and manufacturing output grew by 0.7 percent over the quarter. The second quarter isn’t looking quite so positive, with factory output in the US falling by 0.4 percent in June, the biggest fall in a year despite all time high results in April, leading to a fall in Asian stocks. This softening towards the end of June might reflect a drop in export airfreight tonnages in the same period but this is yet to be officially recorded.
Hellmann started showing signs of growth, most notably within airfreight, mid January 2010, representing a higher volume of exports leaving the UK, seeing the first quarter of 2010 as one of the strongest quarterly performances in terms of production yet. The second quarter started steadily and maintained this pace before a slight dip at the end of June and then a plateau in July, and this has been mirrored across the airfreight industry. Having been in the sector for 22 years and, potentially a little over cautious, what I have seen over the last few months makes me believe we could potentially enter into a ‘stagnated’ economic period whereby the deficit cutting verses the private sector economic growth equals a slowing down in growth or even zero growth for a short period, hence if our Government makes the wrong decision we could see negative growth in the UK.