Friday Focus: Logistics as a barometer for the economic climate
Fri, 10 Sep 2010
Matthew Marriott believes trade patterns so far in 2010 indicate industry faces a stagnant period, in which government deficit-cutting verses private sector economic growth will equal a slowdown in growth
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 doesn’t appear to be anything that is going to change in the immediate future.
This, alongside the growth of the trade deficit to £3.8 billion in May in goods and services, and the rise of exports by less than £100 million, compared to the rise of imports by £700 million, 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 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 saw a drop in volumes in June, which reflects the factory output statistics recently issued where we saw a 0.4% drop over the previous year. This again shows the trend value of air freight against government statistics and how air freight could, potentially, be used more as a quick barometer for the economy on certain statistical topics and audit checks.
In terms of how logistics and the economy can be related, the international transport industry first needs to be split into two: air freight and ocean freight.
Air freight 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 air freight costs are the first to be cut in a bid to reduce supply chain costs, which naturally has a positive effect on operating costs in the short-term.
In the first four months of 2010, Hellmann saw a surge in air freight and I believe this is a reflection on the industry as a whole. In June, however, there was a softening in tonnages, especially in exports, which is indicative of recent factory output results and slight reduction in UK production levels. This also supports the argument that transport activity can be used as a barometer for the economy. Airlines have also reported lower aircraft utilisation on exports, which suggests activity is slowing down in some regions of the world.
Ocean freight, 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, so they have created a market that has less capacity through idle ships and raised rates through capacity shortages. Sea freight container volumes this year arehigher than lasy year’s, which again shows the market in the UK has picked up.
Air freight is the first product to see the negatives and positives of the market, as it is the fastest form of transport. The question for us all is: if the air freight market softens first, as it has on exports in June and July, will the ocean freight 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 general uncertainty in the world markets.
In order to look into this accurately, factory order growth must be considered. In China – a powerhouse in terms of manufacturing – a slowdown in the pace of growth in factory activity has been recorded.
The UK is in similar turmoil, with orders at factories falling to the lowest level in almost 17 years, according to the media. That the trade deficit has continued to grow despite the weak pound is concerning, due to recent increases in its value compared with 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% between January and March this year, the last quarter of 2009 saw GDP growth of 0.4%, and manufacturing output grew by 0.7% over the quarter. The second quarter isn’t looking quite so positive, with factory output in the US falling by 0.4% in June, the biggest fall in a year despite all-time high results in April, leading to a fall in Asian stocks. This softening might reflect a drop in export air freight tonnages in the same period, but this is yet to be officially recorded.
Hellmann started showing signs of growth, most notably in air freight, 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 before a slight dip at the end of June and then a plateau in July, and this has been mirrored across the air freight industry. Having been in the sector for 22 years and, potentially a little overcautious, I believe we could enter into a “stagnant” economic period, whereby deficit cutting verses private sector economic growth equals a slowdown in growth, or even zero growth for a short period. Hence if the UK government makes the wrong decision, we could see negative growth in the UK.
Matthew Marriott is Commercial Director of Hellmann Worldwide Logistics
This, alongside the growth of the trade deficit to £3.8 billion in May in goods and services, and the rise of exports by less than £100 million, compared to the rise of imports by £700 million, 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 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 saw a drop in volumes in June, which reflects the factory output statistics recently issued where we saw a 0.4% drop over the previous year. This again shows the trend value of air freight against government statistics and how air freight could, potentially, be used more as a quick barometer for the economy on certain statistical topics and audit checks.
In terms of how logistics and the economy can be related, the international transport industry first needs to be split into two: air freight and ocean freight.
Air freight 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 air freight costs are the first to be cut in a bid to reduce supply chain costs, which naturally has a positive effect on operating costs in the short-term.
In the first four months of 2010, Hellmann saw a surge in air freight and I believe this is a reflection on the industry as a whole. In June, however, there was a softening in tonnages, especially in exports, which is indicative of recent factory output results and slight reduction in UK production levels. This also supports the argument that transport activity can be used as a barometer for the economy. Airlines have also reported lower aircraft utilisation on exports, which suggests activity is slowing down in some regions of the world.
Ocean freight, 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, so they have created a market that has less capacity through idle ships and raised rates through capacity shortages. Sea freight container volumes this year arehigher than lasy year’s, which again shows the market in the UK has picked up.
Air freight is the first product to see the negatives and positives of the market, as it is the fastest form of transport. The question for us all is: if the air freight market softens first, as it has on exports in June and July, will the ocean freight 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 general uncertainty in the world markets.
In order to look into this accurately, factory order growth must be considered. In China – a powerhouse in terms of manufacturing – a slowdown in the pace of growth in factory activity has been recorded.
The UK is in similar turmoil, with orders at factories falling to the lowest level in almost 17 years, according to the media. That the trade deficit has continued to grow despite the weak pound is concerning, due to recent increases in its value compared with 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% between January and March this year, the last quarter of 2009 saw GDP growth of 0.4%, and manufacturing output grew by 0.7% over the quarter. The second quarter isn’t looking quite so positive, with factory output in the US falling by 0.4% in June, the biggest fall in a year despite all-time high results in April, leading to a fall in Asian stocks. This softening might reflect a drop in export air freight tonnages in the same period, but this is yet to be officially recorded.
Hellmann started showing signs of growth, most notably in air freight, 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 before a slight dip at the end of June and then a plateau in July, and this has been mirrored across the air freight industry. Having been in the sector for 22 years and, potentially a little overcautious, I believe we could enter into a “stagnant” economic period, whereby deficit cutting verses private sector economic growth equals a slowdown in growth, or even zero growth for a short period. Hence if the UK government makes the wrong decision, we could see negative growth in the UK.
Matthew Marriott is Commercial Director of Hellmann Worldwide Logistics
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