According to Reuters’ article published on October 19, 2022, global freight volumes have begun to fall as overall consumer and business spending slows and the composition rotates from merchandise back to services after the pandemic.
Slower growth in freight and manufacturing will ease pressure on supply chains and commodity markets, taking some heat out of inflation, currently running at the fastest rate for 40 years.
The slowdown is a necessary part of the rebalancing process after exceptionally rapid growth in merchandise trade and output in the second half of 2020 and throughout 2021.
It will eventually dampen consumption of middle distillates such as diesel and gas oil, allowing severely depleted inventories to be rebuilt and fuel prices to fall back.
But it also threatens to spill over into the services sector, which employs many more workers, which would transform a mild economic slowdown into a much deeper and more prolonged one.
FREIGHT SLOWDOWN
Most measures of container freight and manufacturing activity appear to have reached a cyclical peak in the final quarter of 2021 or the first quarter of 2022 and been gently declining since then:
- Maritime container volumes handled through the southern California ports of Los Angeles and Long Beach have been trending lower since the start of 2022.
- The number of loaded containers handled by Los Angeles and Long Beach in the three months from June to August was down by 49,000 twenty-foot equivalent units (1.5%) compared with 2021.
- Container freight through the port of Singapore was below prior-year levels in seven of the ten months between December 2021 and September 2022.
- Air cargo handled through London’s Heathrow was below prior-year levels in five of the six months between April and August 2022.
- Air cargo handled through Tokyo’s Narita was below prior-year levels every month between March and August 2022.
In late 2021 and early 2022, manufacturers and distributors over-ordered raw materials, semi-finished items and finished products to avoid a repeat of last year’s supply disruptions.
But they have been left trying to reduce excess inventories by cutting new orders after household and business spending on merchandise slowed in 2022.
The slowdown in maritime cargo has caused container shipping lines to cancel sailings to reduce capacity and limit downward pressure on freight rates.
Even so, China’s container shipping index, a composite measure of the cost of sending cargo by sea, has fallen by 43% since the end of January, though costs are still more than double compared with October 2019, before the pandemic.
MANUFACTURING STALLS
The slowdown will gradually unblock supply chains and ease some of the intense upward pressure on merchandise prices that has occurred since mid-2020.
Manufacturing production has started to fall in many of the advanced economies:
- Germany’s industrial output was down 2% in the three months between June and August compared with the three months from December 2021 to February 2022.
- Eurozone manufacturers reported lower business activity in each of the three months from July to September, according to purchasing managers’ surveys.
- U.S. manufacturing activity has been essentially flat since March according to estimates produced by the Federal Reserve.
- U.S. manufacturers reported new orders fell in three of the four months between June and September, according to the Institute for Supply Management.
As growth in output, employment and incomes slow in the advanced economies, their merchandise demand is likely to decelerate further in the remainder of 2022 and well into 2023.
The World Trade Organization forecasts merchandise trade will increase by just 1.0% in 2023 after rising 3.5% in 2022 (“Trade growth to slow sharply in 2023”, WTO, Oct. 5).
The forecast growth in world merchandise trade volumes next year would be among the slowest rates in the last 40 years.
Slower volume growth only occurred during the U.S./China trade war in 2019 and U.S. recessions in 2020, 2009 and 2001.
Even that forecast may prove optimistic, however, as global central banks raise the cost of borrowing at the fastest rate since the early 1980s.
The slowdown in industrial output and freight has already been underway for at least the last 3-6 months in most countries. In time, it will ease some of the pressure on the supply of middle distillates and goods inflation.
The critical question is how far and how long the economy will have to slow to rebuild distillate stocks to more comfortable levels and bring inflationary pressures under control.
