IHS Global Insight Inc. (www.globalinsight.com) is a leading consulting company providing comprehensive economic information and forecasts on countries, regions, and industries with particular expertise in global trade and transportation. IHS Global Insight serves more than 3,800 clients in industry, finance, and government through offices in 13 countries covering North and South America, Europe, Africa, the Middle East, and Asia.
As the global economy continues to slow, supply chain managers should be prepared to see international trade growth take a hit. IHS Global Insight's latest trade forecast highlights the fact that international trade cannot be decoupled from the financial crisis that has engulfed many parts of the world. International trade is closely correlated to gross domestic product (GDP) and import costs. As these market indicators dip, so too will trade, causing repercussions up and down the supply chain.
As 2008 draws to a close, U.S. imports face their second year of negative growth. The growth rate for the large Asia-to-Europe trade will also shrink this year to just above standstill, with the threat of negative growth for next year. The overall outlook for next year is no brighter. With the U.S., Canadian, and Eurozone (those countries that use the euro) economies now contracting, we are forecasting a global recession for 2009. IHS Global Insight defines a recession as annual growth below 2 percent.
The GDP-trade connection
If you compare the trend line for international trade growth to the trend line for GDP growth, you will see a close correlation. Simply put, when economic growth is accelerating, trade growth will accelerate faster; when economic growth is decelerating, trade growth will decelerate faster.
Figure 1 shows this relationship between world economic and trade dynamics. By comparing world constant dollar trade growth to world constant dollar GDP growth, it clearly shows that the fluctuation of world trade growth generally is an amplification of the fluctuation of economic growth.
In addition, the graph shows a comparison of the current and previous ("old") forecasts. The rapid change in the determinants of short-term economic growth has caused many economists to alter their forecasts for gross domestic product and for trade growth. Figure 1 illustrates the degree to which IHS Global Insight adjusted its forecasts after the current financial crisis entered a severe stage.
The impact of import costs
How significantly trade growth will react to the changes in the economy depends on many other factors, including policy interventions. Import costs, however, are the major secondary influence on trade growth. Import costs are a combination of the price of the goods themselves plus import tariffs, foreign exchanges rate impacts, transport prices, and other related costs.
To demonstrate the relationship between import costs and trade growth, let us consider two recent examples. In 2003, during the recovery from the 2001 global recession, worldwide GDP (measured in real terms) grew by 2.7 percent, up from a lackluster 1.9-percent growth rate in 2002. During the same period, the value of world trade increased by 14.6 percent. Why the double-digit increase? In 2003, world import costs dropped by 5.3 percent, which served to heighten trade growth. In contrast, when world GDP grew by 3.5 percent in 2005, world trade grew only 6.7 percent. While it is true that world economic growth had decelerated from a 4-percent growth rate in 2004, a 4.5-percent increase in world import costs also helped to dampen trade growth.
The outlook
Now that we have established which factors can affect world trade, let's look at the projections for 2008.
Total world trade is now forecast to grow 3.6 percent (in tonnage terms) in 2008, compared with 4.2percent growth in 2007. The forecast of world trade for 2008 will be slightly stronger than world GDP growth primarily because of the 22.2-percent increase in U.S. seaborne exports in 2008.
Figure 2 breaks down seaborne trade by service type. It shows that dry bulk movements are projected to grow at the fastest rate in 2008—7 percent versus 2.5 percent in 2007. This is due primarily to the betterthan- expected growth of U.S. exports in 2008 and the fact that approximately 56 percent of all exports from the United States are dry bulk.
Container trade, however, is now projected to grow more slowly than in the last few years. In 2008, container trade will grow only 4 percent, compared with more than 9 percent in 2007. Reduced consumer demand in the United States and Europe this year has dealt a blow to this segment of the maritime industry. Nevertheless, in the long run, container trade will continue to be the fastest growing service type, rising at a compound annual rate of 5.0 percent between 2008 and 2025.
General cargo is expected to grow 5 percent in 2008. Over the long term, it will experience the second fastest growth rate, increasing at a compound annual rate of 4.2 percent between 2008 and 2025. Finally, tanker (liquid bulk) will continue to see the slowest growth; we expect growth of only 1 percent in 2008 due to high crude oil prices in the first half of the year.
For ocean carriers, slackening trade should result in a sharp decline in vessel-capacity utilization. In the short term, that will necessitate changes in the carriers' operating networks, such as dropping services and laying up vessels on a voyage-by-voyage basis. Ultimately, excess capacity will force ocean carriers to lay up even more vessels and cancel orders for new ships as they try to maintain their business and weather the tough economic times ahead.
Ocean carriers have warned that 2008 and 2009 will be horrible years for them financially. Most of the top carriers are either family- or state-owned companies and therefore will not come under stock market pressures. But all carriers, regardless of ownership, will be affected by the downturn and will have to find the resources to weather the storm of heavy losses and insufficient cash flow.
The negative environment for ocean carriers could provide some benefit to supply chain managers. Many carriers will be looking for new business to mitigate their falling revenues and therefore will be more open to negotiating pricing or service-level terms that are more favorable for shippers. However, there will also be cases where market disruption is so severe that certain transportation providers will strategically retreat from certain markets, leaving shippers looking for alternatives. Finally the slowdown in trade could lead to increased demand for warehousing and distribution space as inventories temporarily accumulate while production and shipments adjust to lower demand. As a result, for some supply chain managers, the task of meeting inventory-storage requirements may be somewhat more challenging than in the past.
Residents and businesses along the Florida panhandle today are keeping a close eye on Tropical Storm Helene, which is forecasted to strengthen into a major hurricane by the time it strikes the northeast Gulf Coast on Thursday.
Hurricane and storm surge watches are already in effect for that area, which could see heavy rain and flash flooding across portions of Florida, the Southeast U.S., Southern Appalachians, and the Tennessee Valley, according to predictions from the National Hurricane Center.
The storm would come a month after Hurricane Debby delivered drenching rainfall for days over Florida in August and after Hurricane Beryl hit Houston in July, knocking out power across the region.
As Helene continues to gather strength from the warm waters of the Gulf of Mexico, experts are warning that the storm’s impacts could include the Port of New Orleans, agricultural operations throughout the Southeast, and additional citrus and fruit farming business in Florida, according to a report from Everstream Analytics’ chief meteorologist Jon Davis.
From a supply chain perspective, additional disruptions could include rail and road transportation stoppages, closures of interstate highways I-10 and I-75, widespread power outages, and shutdowns of offshore energy operations in the eastern portion of the Gulf of Mexico, Davis said.
As the third potential hurricane to hit the area within as many months, the arrival of Helene shows that extreme weather events aren’t just anomalies, but rather they’re the new normal for shipping companies and port authorities, according to Frank Kenney, Director of Industry Strategy at the technology consulting firm Cleo.
To cope with that constant battering, businesses need to adopt a new mindset, he said. “The only way to keep supply chains running smoothly is to build resilience into every aspect of operations. This starts with diversifying logistics strategies. If a shipper is dependent on a single route or port, they’re setting themself up for trouble. Instead, it’s crucial to have multiple backup routes and options ready to deploy when the unexpected happens,” Kenney said.
Following that strategy, inland ports such as Savannah and Macon, Georgia, will likely gain importance in coming years since their locations offer proximity to ocean ports while also providing access to major highways and some protection from coastal flooding. “In short, the storm isn’t going away, but by embracing diversification, leveraging technology, and ensuring supply chain visibility, U.S. ports and shipping companies can stay ahead of the curve. The companies that prepare for these challenges now will be the ones that continue to thrive, no matter how extreme weather events rock the boat," Kenney said.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”