The November issue of DHL Road Freight Market News sheds light on the economic developments in Europe at the beginning of the fourth quarter of the year and their impact on the European road freight market. As always, you can find more information on former developments in our previous issue.
Inflation-related Loss of Purchasing Power and Economic Uncertainty Continue to Substantially Burden the Economy
The global economy continues to be faced with major challenges. The war in Ukraine, the resulting energy crisis, and the inflation fueled by the latter have led to a loss of purchasing power across Europe in 2022. In the euro area, the latest figure published by Eurostat, the European Union's statistical office, for the annual inflation rate was 10.7 percent in October 2022. The highest annual rates were recorded in Estonia (22.4 percent), Lithuania (22.0 percent), and Latvia (21.8 percent). In Europe’s largest economy, Germany, the latest inflation rate was 11.6 percent, the highest level since 1951.
Against the backdrop of inflation rates continuing to rise, the European Central Bank (ECB) decided on the next major interest rate hike at the end of October. The key interest rate was raised for the third time in a row in 2022 – from 1.25 to 2.0 percent. It remains to be seen whether this step will have a sufficient effect. After all, the ECB expects a further weakening of the economy in the euro countries in the coming months and hence explicitly reserves the possibility of further interest rate hikes.
In contrast to the ongoing sharp rise in annual inflation rates in the EU, European economic growth in October appears to have stabilized to some extent. In October, S&P Global (formerly IHS Markit), for instance, forecast GDP growth of around 3.2 percent for Europe this year. This represents an increase in European economic growth of around 0.4 percentage points compared with September. A slight consolidation can be seen in the largest European economies in particular: Germany, France, and Spain, all of which had recently expected a significant contraction in their economic output towards the end of the year. Despite the predictions of many economists, the economy remains relatively stable amid difficult global economic conditions, such as the ongoing COVID 19 pandemic, disrupted supply chains, rising prices, and the war in Ukraine.
It can be strongly assumed that the after-effects resulting from the end of the severe COVID 19 measures and the various stimulus packages have so far more than compensated for the negative impact of the Ukraine war and the rise in energy prices. The outlook for the end of the year is therefore marginally more positive than recently, partly due to the strong economic performance in the first two quarters. Nevertheless, high energy prices are having a significant overall effect on all sectors of the economy, especially energy-intensive industries, where both business expectations and production plans are down significantly.
Notwithstanding the modest improvement in economic expectations as reported, for example, by the Leibniz Centre for European Economic Research in Mannheim, the economic mood remains gloomy, particularly with a view to the coming winter half-year. According to data from S&P Global, the euro economy is threatened with a slowdown in growth or even a contraction at the beginning of the fourth quarter of 2022. The German economy in particular is a cause for concern, economists say.
However, it is not only economic factors that are contributing to a potential recession; the European economy is also being put under pressure by the potential threat of a new COVID 19 high in the winter. The threat of high levels of sick leave is an additional burden for industry, which is already suffering from a shortage of skilled workers. Moreover, renewed lockdowns would pose another major challenge to global supply chains and related production. On the other hand, the reduced likelihood of gas shortages over the winter and lower wholesale gas prices give German economists reason to hope for a relatively shallow recession.
In sum, it can be concluded that the European economy was able to consolidate temporarily in October, although this development is more likely to represent a short-term breather than a long-term trend. Reliable forecasts for the winter appear difficult at present in view of the great economic incertitude.
Steadily rising price inflation and general economic uncertainty are becoming more and more apparent in the transport logistics sector. Established participants in the road freight market report a decline in demand for logistics services in the third quarter and forecast that this trend will continue for the time being. This decline in demand is also reflected in TIMOCOM’s capacity index. For October an average cargo-to-available-space ratio of 72:28 is reported. Untypically, this is even a little below the level of the traditionally quieter summer months of September (78:22) and August (73:27). Even if this indicates that the supply of capacity on the market is generally improving, the bottleneck situation remains.
This is also mirrored by the further rise in transport prices, which have been at a persistently high level since last summer. This development is primarily driven by the price of diesel. Compared with September, this has risen by a full 13 cents per liter: for October 2022, Eurostat indicates a weighted average diesel price of 1.97 euros per liter for the 27 European member states. This puts the price of diesel in the European Union at the record level of June and July (2.00/1.95 euros per liter). The diesel price surge implies further intensification of the price pressure on freight forwarders. It still has to be seen how the situation will develop over the course of this year’s peak season and to what extent the costs of road freight will continue to increase. In general, however, the market environment can be expected to become ever more challenging and the underlying economic conditions to stay uncertain.
Major challenges call for flexible solutions. Despite the uncertainties and the unpredictability of the crisis, you can rely on DHL Freight to continue to monitor and evaluate market events and possible influences very closely and continuously. This will enable us to derive necessary conclusions for the freight business: targeted measures to ensure appropriate quality.
Currently, conditions can change very quickly for all market participants. Especially in such times, open and transparent communication is a top priority for DHL Freight. The next update with details on the development of the road freight market in November will again be published at the beginning of next month.