OECD forecasts wild uncertainty

The latest forecasts from the OECD are somewhat dramatic. Titled “Global economy faces a tightrope walk to recovery” it states that “Covid-19 pandemic has triggered the most severe recession in nearly a century and is causing enormous damage”.

Its prognostications are alarming. The economists at the OECD have predicted that the “Euro area GDP is expected to plunge by 11.5% this year if a second wave breaks out, and by over 9% even if a second hit is avoided, while GDP in the United States will take a hit of 8.5% and 7.3% respectively, and Japan 7.3% and 6%”.

Emerging economies such as Brazil, Russia and South Africa are expected to fall by “7.4%, 8.0% and 7.5%”. However, the OECD sees that China and India will be “relatively less affected” with respective falls of 2.6% and 3.7%.

The forecasts vary enormously, depending on what the OECD calls a “second wave”, that is, whether the COVID-19 re-emerges as a problem. Of course, the OECD is a group of economists so they have little or no idea if a ‘second wave’ is a credible theory. It is hard to know how much weight to attach to such forecasts.

Indeed, the OECD forecast is useful to the degree that they illustrate the uncertainty of short and medium prospects. The implications of this uncertainty may be felt particularly harshly in logistics markets.

Lack of confidence in the future is likely to suppress the willingness of specific logistics sectors to invest in, or even bring back into operation, new capacity. Rather, their nervousness is likely to result in a focus on the sustainability of prices and profits, something that has been surprisingly illustrated in the container shipping sector. The consequence of such an approach may mean that if demand returns rapidly, freight rates may increase disproportionately. However, bearing in mind there is no shortage of trucks, ships or aeroplanes and that unemployment is likely to rise substantially, there will be substantial options for logistics service providers to respond to increased demand at some point in the medium-term.

The result is likely to be large swings in prices and rates combined with some disruption such as periods of cargoes being ‘rolled’. The possibility is that such instability may last for a couple of years.  

Source: Transport Intelligence, 11 June 2020

Author: Thomas Cullen