The outlook for economic development in Europe, and especially in Germany, remains bleak in the fourth quarter of 2024, primarily due to the declining order situation. Accordingly, as in previous quarters, the sentiment derived from the short and medium-term forecasts is subdued.
In this issue of DHL Road Freight Market News, we take our usual look at important details and trends for the previous quarter, that is, the months of October, November, and December 2024. Where does the EU economy stand after the fourth quarter of 2024 and how is the European road freight market performing? You can find information on the trends for the third quarter of 2024 in our previous issue.
Moderate Growth Forecasts Burden the Upswing in Europe
The risks and uncertainties facing the European economy in Q4 have hardly diminished compared to previous quarters. Russia’s ongoing war of aggression against Ukraine and the conflict in the Middle East continue to impact negatively on consumption and the willingness to invest. The protectionist policies of many of the EU’s trading partners are also slowing down the EU economy. In its fall forecast for 2024 as a whole, the European Commission now expects gross domestic product (GDP) to increase by 0.9% in the EU and 0.8% in the euro zone.
In the short to medium term, the Commission anticipates that the EU economy will grow moderately. This is expected to be driven by rising consumption and investment. For 2025, the Commission estimates that economic activity will increase by 1.5% in the EU as a whole and by 1.3% in the euro zone. However, this can only lead to limited optimism in Europe, given that the OECD is forecasting global growth of 3.3% in 2025.
Weaker Global Demand for Industrial Goods Restrains Production and Exports
Overall, there was weaker demand for industrial goods. As a result, EU exports to other EU countries fell by 0.7%. Exports to third countries fell much more sharply, dropping by 5.3%.
The decline in orders is also reflected in S&P Global’s Purchasing Managers’ Index (PMI). The PMI, or EMI (“Einkaufsmanager-Index”) in Germany, is made up of several sub-indices and is a useful indicator of the health of a particular sector of the economy. December’s reading of 49.6 was higher than November’s 48.3, but still below the crucial 50 mark that separates growth from contraction. The decline in new orders and production is also clearly reflected in the manufacturing PMI, which fell 0.1 point to 45.1 in December, its 30th consecutive month below the 50 mark.
Continued Downturn in Industry and Consumer Confidence
The business outlook in industry and the service sector deteriorated sharply in the fourth quarter. This is also reflected in the Economic Sentiment Indicator (ESI). After falling by 0.6 points to 96.1 in October, the EU ESI rose by 0.1 points to 96.2 in November, despite the tense situation. In December, though, the indicator fell by 1.7 points to 94.5 points. Managers’ assessment of business conditions remained broadly unchanged, while consumer confidence declined for the second month in a row. Consumers were much more pessimistic about the general economic situation in December, and their intentions to make major purchases were also weak.
Inflation and Interest Rates in Q4 and throughout 2024
After an annual inflation rate of 2.0% in October, it rose to 2.3% in November. Services and food were the main drivers of inflation. After an overall inflation rate of 5.4% in the euro zone in 2023, the European Commission expects inflation to decrease by more than half to 2.4% in 2024.
And the decline in inflation is likely to continue. According to the European Commission, inflation is expected to be 2.1% in 2025 and only 1.9% in 2026. This also means that for the next two years, inflation will remain within the European Central Bank’s (ECB) medium-term inflation target of 2%.
At the same time, the ECB is sticking to its course of responding to the weak eurozone economy by easing monetary policy and cutting its key interest rate by a further 0.25% to 3% in December 2024. This will make credit cheaper for businesses and consumers and should lead to increased investment. If the rate cut also boosts the general confidence of industry, trade, services, and consumers, this could provide further impetus for an economic recovery.
Cautious Prospects of Recovery in Germany Due to Recession and Structural Challenges
German industry is still in recession and the number of people employed is now also dropping significantly. In its fall forecast, the European Commission expects German GDP to decline by 0.1% in 2024. This means that the German economy has been stagnating for five years.
The Commission is also forecasting that German GDP will grow by 0.7% in 2025 and 1.3% in 2026 as a result of rising real wages and increasing demand. By contrast, the German Council of Economic Experts expect growth of just 0.4% in 2025 due to unemployment in Germany, which threatens to reach the three million mark this winter.
Export-Oriented German Economy Fails to Benefit from Global Recovery
The export-oriented German industry is particularly affected by the weak order situation in Germany and the loss of purchasing power of companies due to inflation. In terms of foreign trade, the German export economy is increasingly decoupled from global economic developments.
Especially manufacturing companies are suffering from a noticeable loss of competitiveness, primarily in non-European markets. This is being attributed to structural causes. Developments such as digitization and the decarbonization of the economy, as well as demographic change and the shift in global supply chains, require a reorganization of operational structures.
In addition, many companies must respond to further rising energy prices, stricter regulatory requirements from Germany and the EU, and the ongoing shortage of skilled workers by making structural adjustments, such as relocating abroad. This is particularly true of energy-intensive production, which is increasingly at a competitive disadvantage in international comparison. As a result, many companies are announcing job cuts. Entire plants are threatened with closure, especially in the automotive and associated supply industries.
German Economic Sentiment Continues to Deteriorate
In line with the economic situation, business sentiment in Germany has also worsened significantly. In particular, the German automotive industry, which we discussed in more detail in the last Market News for Q3 2024, is taking a more pessimistic view of the present and the future. The ifo Business Climate Index for the automotive industry fell from -29.0 in October to -33.9 in November.
Also, the ifo Business Climate Index for the German economy as a whole fell to 85.7 points in November (from 86.5 points in October), mainly due to a more pessimistic assessment of the current situation, especially in the manufacturing industry. This trend is being followed by the services sector, whose specific business climate index has also fallen substantially in November. Services companies are less optimistic about both their current situation and their expectations. This trend continued in December, with the Ifo Business Climate Index dropping further to 84.7 points, its lowest level since May 2020.
However, many companies report that they have begun to make targeted structural adjustments and are therefore somewhat more hopeful about 2025.
Services as a Driver of Inflation in Germany
In late summer, the inflation rate in Germany was still below two percent (1.6% in September and 1.9% in October). In November, at 2.2%, it was back above the 2% mark. According to the Federal Statistical Office of Germany (Destatis), the increase is attributable to above-average price rises for services. Price developments for energy and some consumer goods again dampened the inflation rate in November, but to a lesser extent than in previous months. In December, the inflation rate rose further to 2.4%. Inflation in Germany is expected to average 2.2% in 2024.
For 2025, economic forecasts by ifo predict an inflation rate of 2.3%, similar to 2024. Inflation in 2025 will be pushed up by a number of special effects, such as the increase in the price of the “Deutschlandticket” (a subscription public transport ticket for all local public transport) and private health insurance. In 2026, the inflation rate is anticipated to fall to 2.0%.
Development in the Road Freight Market
The logistics indicator of the German logistics association BVL shows a slight upward trend in the business climate in the German logistics industry (86 points in November after 84.4 points in Q3).
This reflects not so much the current business situation as expectations for the future. The former remains difficult for logistics service providers and their industrial and commercial customers. Nevertheless, business expectations have improved steadily over the course of the year. With a rise to 88.6 in November (from 80.2 in January), the index value for business expectations is now significantly higher than the value for the business situation (83 points).
Industry representatives surveyed for the BVL Index expect double-digit growth rates in the coming year. This positive outlook seems to counteract the geopolitical uncertainties and the difficult situation faced by German industry, with fears of site closures and job cuts, especially in the manufacturing sector. It remains to be seen whether this growth will actually materialize in 2025.
Closures, Insolvencies, Fleet Downsizing, and Skills Shortage Reduce Capacity
Despite the reduced demand, the ratio of freight to cargo space in the EU was still higher in October (76:24), November (74:26), and December (72:28) than in 2023 (68:32; 63:37; 66:34), according to the TIMOCOM Transport Barometer.
Many resources are disappearing from the transportation market due to company closures, insolvencies, or because transport logistics companies are downsizing their fleets for cost reasons.
The skills shortage also remains an important issue for the logistics industry. According to the “Skilled Workers Report 2024” by the German Chambers of Industry and Commerce (DIHK), more than half (52%) of the transport and warehousing logistics companies surveyed stated that they are experiencing staff shortages and are looking for personnel accordingly.
Transport Prices Remain High
Transport prices remain at the high level of the third quarter. The persistently moderate diesel prices do not change the overall high transport costs. In mid-December 2024, the weighted average price of diesel for the 27 European member states was €1.56, slightly above the €1.51 recorded in mid-September, but well below the €1.63 level of mid-December 2023.
Factors other than diesel play a significant role in driving prices. For example, many European countries have not yet fully implemented the current EU directives on road tolls for heavy goods vehicles and now have to catch up with the corresponding toll adjustments. In Denmark and Austria, this is the case as early as January 1, 2025.
The Market Situation in Summary
Inflationary pressures have eased, but the weak order situation is curbing exports and depressing sentiment, particularly in Germany, where growth is slightly negative. The relevant indicators continue to show a bleak sentiment among German and European companies, although logistics companies are more positive about the future than companies in general.
All in all, signs of a gradual recovery remain subdued, although growth in Europe has accelerated moderately over the course of 2024.
Outlook for Further Development
The conditions for an economic upturn next year are in place, thanks to rising real wages and a corresponding increase in consumption. However, cautious consumer confidence and a high level of uncertainty are increasing the incentive for households to save. Whether the forecast GDP growth in Europe and Germany will be achieved is thus highly unpredictable. How the respective economies will perform in 2025 will also depend on financial and geopolitical developments, which are key drivers of demand. Geopolitical upheavals in particular represent an imponderable factor of uncertainty.
