China’s COVID hangover will not see a return to previous normality

china sees record exports

That COVID-19 is still a problem for the logistics markets in 2023 is remarkable.  

China’s withdrawal from its Zero-Covid policies ought to have opened-up its economy, with the effect that areas such as air transport would increase. In reality the reverse seems to have happened, with a string of countries re-imposing controls on flights into China. Presumably this will be temporary and air hubs in China, but also Hong Kong, will see some sort of return to normal volumes of both passengers and freight.

Yet the longer-term trajectory of the Chinese economy seems as if it will not resume to that of 2019. Not only has the COVID-19 crisis shaken the country but many of the underlying contradictions in its huge economy are emerging, with domestic demand faltering as debt levels rise. In response the Chinese economy has turned to export driven growth to an even greater extent, resulting in a huge trade surplus. However, this is unlikely to be sufficient to support its economic aspirations even if China’s trade partners continue to tolerate such an imbalance. The impact of these economic changes will be one of the key themes of 2023 for the logistics market.

Another will be the prospect of recession. The US economy teeters on the edge of a downturn, despite the full employment and a buoyant oil and gas sector. Europe is different, with volatile energy costs crippling a number of sectors whilst consumers are affected by high prices for energy. Here it would seem some sort of downturn is unavoidable. Much of the rest of the world may be sucked-downwards as well.

If the shorter-term economic direction looks uncertain, the longer-term restructuring of many sectors looks clearer. Energy, chemicals, automotive are all seeing major changes in both the nature of production and supply chain operations. Car output volume is recovering, resulting in higher costs in car-carrying shipping for example. Trade patterns around the chemical sector are also changing and this may be a trigger for other industries to follow. That said, the revolution in e-retail that was seen in 2021 appears to have collapsed.

Certainly counter-inflationary forces are strong in the logistics sector. The container shipping market is heading from feast-to-famine, with an over-supply of ships and containers. Air freight may be following it, with Express carriers seeming to have surplus aircraft. Other sectors such as warehousing are clearly cooling although road freight so far has not been hit so badly, apart from the issue of fuel costs.

It will be interesting to see how well the large freight forwarders cope with these new market conditions and how the large shipping lines that diversified into area such as airfreight prosper. A further important aspect of the changed economic environment is the increase in interest rates. More-or-less absent for over a decade, they have flattered many balanced sheets and sustained ambitious investment strategies. The end of this may be the most painful for all.

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