Europe’s economic growth continues to slow, and there are suggestions that the continent is heading toward a recession. This means that demand for goods will remain low and could fall further. Inflation has left European consumers poorer with reduced discretionary incomes, resulting in reduced demand for logistics services. But does this have a silver lining in the long run, even if it means pain in the short term?
Consumer Demand:
A range of data confirms that consumer demand is way down on previous years and continues to fall or slow. Destatis data puts non-food retail in Germany down 5.3 points year-on-year (Y-o-Y) and down a further 1.6 points in Q3 2023. UK volumes are also continuing to fall, with retail sales in September 2023 down 1.5 points versus three months ago and 0.9 points Y-o-Y. In Q3 2023, French price-adjusted retail expenditure is down 1.3% Y-o-Y but grew by 0.9% versus the previous quarter.
How has this affected logistics markets?
Lower retail activity has reduced volumes in European logistics markets and in turn pulled down rates. Ti’s Q2 2023 Ocean Freight Tracker shows that low volumes have led to a normalization of the ocean freight market, with the cost of shipping a 40ft container now down on average $12,000 versus 2021. This has been driven by lower port volumes, which are down 25.6 points Y-o-Y in Ti’s European port index.
Further evidence can be found in the European road freight market. The Q3 2023 Ti x Upply x IRU European benchmark shows that the spot index has fallen further below the contract index and as reduced volumes create excess capacity and pull rates down.
Where is the silver lining?
The key positive is that further volume drops suggest the continent is heading towards recession rather than stagflation.
While everyone loves periods of growth, growth becomes particularly distasteful when it is accompanied by high inflation. Indeed, central banks around the world have raised interest rates to stem inflation and prevent economies from overheating.Falling volumes suggest reduced economic activity, which will reduce inflation as economies cool from a period of overheating. Euro area headline inflation has recently dropped to 4.3%, almost a two-year low, down from an all-time high of 10.6% in October 2022.
Core inflation (inflation with the volatile components of food and energy stripped out) has lagged headline. Core inflation peaked at 5.3% in March 2023 and now sits at 4.5%. Core inflation remains elevated, and this has raised fears of stagflation.Stagflation is a combination of low/muted economic growth, high inflation, and high unemployment, which severely limited growth in the medium to long term.
As a result, falling volumes are signs of reduced/negative economic growth in the short term, which can be seen as positive since negative growth will further reduce inflationary pressures and in turn allow the continent to skirt stagflation fears and free up more potential growth in the medium to long term.
Conclusion:
While it must be recognized that recessions are extremely destructive, causing unsustainable conditions that can lead businesses to bankruptcy and individuals to periods of significant struggle, stagflation would result in a much more prolonged period of struggle and limited growth opportunities. Economies now need to cool and drop back below their realistic potential level in order for high growth opportunities to be available to the market again. It’s important that companies use high profits earned from the previous two years to cushion themselves through the oncoming downturn as weak demand will keep prices and profits low.
