With 2023 already showing weak economic development, this trend continues in the first quarter of 2024. The mood in Europe is subdued, while short- and medium-term forecasts are also cautious. In this issue of DHL Road Freight Market News, we take a closer look at key details and trends for January, February, and March 2024. Where does the EU economy stand after the first quarter of 2024 and how is the European road freight market performing? Trends for the fourth quarter of 2023 can be found in our previous issue.
Subdued Economic Growth in Europe and Weak Start to 2024
In 2023, despite various crises, high inflation, and geopolitical tensions, the global economy proved resilient, growing by about 2.9% according to the International Monetary Fund. Analysts expect this resilience to continue over the next two years, with global economic growth of around 2-3% in each year. The World Trade Organization’s latest Goods Trade Barometer indicates that global merchandise trade will contribute to this growth, especially in the first half of the year. Nevertheless, this is only a cautiously optimistic assumption, as the increase in global trade could easily be reversed by regional conflicts and geopolitical tensions, which could lead to a significant slowdown in economic momentum.
Economic dynamism in the EU is rather restrained: after muted growth of around 0.5% in 2023, the EU economy has made a weak start in 2024. Although the overall pace of growth is expected to accelerate from the second half of 2024, forecasts for the year as a whole are below 1.0%. The EU Commission currently anticipates economic growth of around 0.9%, revising its initial forecast by 0.4%. Other institutions such as S&P Global, the European Central Bank (ECB) and Germany’s national development bank KfW expect average annual growth of 0.8% and 0.6% respectively.
Even though indicators such as the S&P Global Purchasing Managers Index are slowly turning positive and point to a stabilization of business activity, the economic recovery expected in 2024 will initially be more muted than assumed in 2023. However, the economy should increasingly stabilize due to rising real wages and a robust labor market. Inflation is also assumed to ease further with lower energy prices and weaker economic momentum leading to a downward trend in inflation.
Annual inflation in the euro zone is estimated at around 2.4% in March, down from 2.6% in February and bringing it closer to the ECB’s target of 2%. There will be certain price pressures after the expiration of energy subsidies in many member states and also higher transportation costs resulting from trade disruptions in the Red Sea, but inflation is not expected to deviate from its downward trend, which should help to stabilize the pace of growth. Based on this, and coupled with the expectation that banks will cut interest rates this year, which should boost the willingness to invest, the forecast for economic growth in 2025 is around 1.5-1.7%.
Shrinking German Economy – Upswing Expected in the Second Half of the Year
In contrast to the overall economic development in the EU, the German economy contracted by around 0.3% in 2023. After this decline, early indicators at the beginning of Q1 did not yet point to a significant recovery, as consumer and business sentiment deteriorated noticeably.
Factors such as weak external demand, strikes and geopolitical tensions, and the ensuing delays in supply chains are having a significant negative impact on economic development. In addition, there is the budget crisis and the associated uncertainty for companies and private households. Following the German Federal Constitutional Court’s ruling on the budget in November 2023, the government passed a federal budget for the current year at the beginning of 2024 and adopted a more restrictive course: companies and households are being burdened more (or relieved less), and government spending is being cut, which has significantly reduced the willingness to invest. As a result, the ifo Institute expects economic output to continue to fall in the first quarter, by a further 0.1% compared with the previous quarter, which means that the German economy is in recession in the winter months of 2023/2024.
For the entire year 2024, economic growth in Germany is expected to be only marginal. The OECD and the EU Commission, for example, anticipate that the German economy will grow by 0.3%, which is already at the upper end of current estimates. While the German government itself expects real GDP to grow by only 0.2%, the five leading German economic research institutes, including the German Institute for Economic Research (DIW Berlin) and the Kiel Institute for the World Economy (IfW), are currently forecasting economic growth of 0.1%, down 1.2% compared to their respective autumn reports.
Nevertheless, experts believe that the economy will have passed its nadir by the first quarter of 2024 and that moderately positive growth rates can be expected for the rest of the year. While foreign trade is likely to continue to stagnate and will not pick up significantly until next year, growth will come mainly from private consumption.
However, the latest consumer confidence index by the German market research company Gfk shows only a slight improvement in consumer sentiment, as the propensity to consume is still being held back by consumer uncertainty due to various crises. To increase private consumption, it is therefore essential that consumers regain more planning security and are thus willing to invest.
Falling Inflation Fueling Optimism – Other Risks Remain
The stable labor market, real income growth, and declining inflation rates are good conditions for increasing private consumer spending in Germany. According to current estimates by the Bundesbank and the ifo Institute, the inflation rate will drop to around 2.5% in 2024 and to 1.6% in 2025.
Besides the falling inflation rate, there are other apparent developments that allow an optimistic view of the full year: e.g., the ifo business climate index rose to 87.8 points in March (85.7 points in February), indicating that companies’ expectations are much less pessimistic. The outlook for exports has also improved considerably since February. While the ifo indicator for export expectations stood at -7.0 points in February, it rose to -1.7 points in March. This is based on the prospect of increasing global trade, from which the German economy is supposed to benefit.
On this basis, the forecasts for 2025 are also much more positive than for 2024. The GDP forecast for 2025 is currently around 1.4%, depending on current economic policy, foreign trade stimuli, and investment activity – which all could be boosted by possible interest rate cuts.
Yet, several uncertainties and risk factors remain. In addition to the possibility that an intensification of geopolitical tensions may impact the development of energy prices, the current economic and financial policies pose a further risk. Against the backdrop of the current budget situation in Germany, and especially in view of the difficult negotiations to be expected on the federal budget for 2025, it is quite likely that urgently needed reforms will be addressed only hesitantly. This stalemate and the uncertainty surrounding key economic policy decisions are paralyzing the German economy and are hampering long-term growth by holding back investment and consumption. Unless the uncertainty is resolved, the expected recovery will probably take longer to materialize.
Development in the Road Freight Market
The deterioration in consumer sentiment and the paralysis of business activity within the EU did not leave the road freight market unscathed, as 2023 was characterized by a significant decline in total volumes, which is likely to continue in 2024. This development is also reflected in the overall business climate for shippers and logistics service providers. For instance, a study by the German logistics association BVL reveals that the overall mood in the logistics sector has worsened significantly and is now at a level similar to that after the collapse of the US investment bank Lehman Brothers in 2008.
Despite the negative trend in demand, the capacity indices for 2023 indicated a continued shortage of available cargo space, although this is also due to some carriers downsizing their truck fleets and therefore offering less capacity than in previous years. According to TIMOCOM, the demand for cargo space in the first quarter of this year is higher than in Q1 of 2023 and, with a ratio of freight to cargo space of 72:28 in March, is not only significantly above the previous year’s figure (49:51), but also above the value for February 2024 (63:37).
Experience shows that the demand for transportation regularly increases at this time of the year in connection with Easter and the beginning of spring, which is the reason for this development. TIMOCOM even expects a stable demand for transport capacities throughout Europe, which will be reflected in freight rates.
Increased Cost Pressure Results in High Freight Rates
The prices for transportation are expected to keep rising, or at least to remain high. Although the diesel price has returned to moderate levels – with a weighted average for the 27 European member states in March at €1.68 per liter – increasing energy and insurance costs, as well as other additional costs, continue to drive up freight rates.
The introduction of new truck toll rates in Germany on December 1, 2023 and the extension of the toll obligation to vehicles with a gross vehicle weight of 3.5 tons or more will also cause a further increase in costs. Furthermore, participants in the road freight market are anticipated to increasingly focus on green technologies and to invest in this area, which will require refinancing.
The Market Situation in Summary
With consumer sentiment subdued and financial and geopolitical uncertainties persisting, an economic recovery is unlikely this year, albeit there are positive signs. With inflation rates continuing to fall and global trade gaining momentum, moderate economic growth is currently expected at least from the second half of the year.
As a direct consequence, road freight volumes are not anticipated to increase until the second half of the year, while freight rates will remain at a high level.
Outlook for Further Development
All in all, it must be considered that forecasts are fraught with uncertainty given the ongoing geopolitical tensions and the risk of further escalation of the conflict in the Middle East. If further disturbances occur in addition to the disruption of the Red Sea shipping route, supply bottlenecks cannot be ruled out, which could slow down production and cause prices to skyrocket. The economic situation is expected to remain at a low level for at least the first half of the year.
The next update, to be published at the beginning of July 2024, will examine market developments in the second quarter of 2024 and the resulting impact on the road freight market. This will ensure continuous open and transparent communication, which is a top priority for DHL Freight.
