In annual reports published by transport and logistics providers, it is often stated that a company’s volume or revenue growth in country X was better (worse) than the previous year thanks to country X’s higher (lower) GDP growth compared to the previous year. This is for good reason. Higher GDP growth is often associated with higher consumption and production growth, which tends to stimulate higher growth in demand for transport and logistics services.
One sector which frequently relates demand for its services to GDP growth is the European road freight sector. In fact, a substantial academic literature has attempted to address the nature of this relationship for a long time (for instance, see McKinnon (2007) or Dunkerley et al. (2014)). In such studies, demand for road freight services is usually measured by road ‘tonne kilometres’. For any given journey, the total tonne kilometres are the tonnage of the load carried multiplied by the total distance transported in kilometres. Essentially, it is the ‘volume’ growth of the road freight sector that is being measured.
Note also that the comparison is usually made to ‘real’ GDP growth, because this measures GDP growth due to changes in the volume of goods and services produced only, the price of goods is held constant. Essentially, the ‘volume’ growth of the economy is being measured.
For a long time, it was thought that 1% road tonne kilometre growth was associated with 1% real GDP growth (or say, 5% tonne kilometre growth was associated with 5% real GDP growth). But more recently, this relationship has broken down. McKinnon (2007) showed that this was the case for the UK between 1997 and 2004, and it is clear from the graph below that this has not held at the EU level since 2007. While at some points the orange and blue lines are quite close together, which would indicate a one-for-one relationship, at other times they are quite far apart, especially during 2008 and 2009. This inconsistency over time makes it difficult to make useful inferences about GDP growth and tonne kilometre growth. The best we can say is that they are positively related – when one goes up (down), the other tends to increase (decrease) also. To what extent? This is not so clear.
However, by looking at ‘volume of production’ growth in the mining, manufacturing and construction sector (essentially measuring the ‘volume’ growth in this sector), it is obvious that a near one-for-one relationship with road tonne kilometre growth has persisted since 2007. The recession is tracked especially well, unlike with GDP. Intuitively, with the mining, manufacturing and construction sector making up a substantial proportion of road freight sector volumes, it is not that surprising that the relationship is much ‘tighter’ than with GDP, a far broader concept. With the link between GDP and road freight demand no longer so clear, perhaps the focus should increasingly turn to other measures to explain the sector’s performance.
In fact, there appears to be a general over-reliance on GDP growth data by the transport and logistics sector. Another obvious example where this arises is international freight forwarding. Growth in a country’s international forwarding volumes are surely more closely related to import and export volume growth, for which statistics are almost as readily available as GDP data. GDP can be especially misleading here as higher import volumes (which are obviously good for the forwarding sector) equate to lower GDP, simply by the way GDP is calculated. By this logic, it is perfectly plausible for an expanding forwarding sector (driven by higher imports) to coincide with falling GDP, all other things equal.
Overall, the message is that GDP should not be considered as the ‘holy grail’ of all logistics indicators. While its easy availability and simple definition make it appealing as a quick justification, it really should be used as part of a basket of measures. And even if you have to use just one indicator, GDP is clearly not always the best.
References
Dunkerley, F., Rohr, C. and Daly, A., 2014. Road traffic demand elasticities: A rapid evidence assessment. [pdf] RAND Corporation. Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/395119/road-traffic-demand-elasticities.pdf
McKinnon, A., 2007. Decoupling of Freight Transport and Economic Growth Trends in the UK: An Exploratory Analysis. Transport Reviews, 27(1), pp.37-64. Online version freely available at: http://www.fcrn.org.uk/sites/default/files/Decoupling_of_Road_Freight_Transport.pdf
