The second quarter of 2023 has gradually put an end to the cautious optimism of the first and gives an indication of the expected overall economic development in 2023. Especially in Germany, the expectations are clouded. In this issue of DHL Road Freight Market News, we look at key details and trends for April, May, and June of 2023. What is the state of the EU economy after the first half of 2023 and how is European road freight developing? Information on the trends in the first quarter can be found in our last issue.
Current forecasts assume that the global economy growth in this and the next year will be relatively weak due to the high price level and increased interest rates. While the World Bank expects global economic growth of 2.1% for 2023, a study by Allianz Research anticipates growth of 2.5%; for the coming year, the forecast is as low as 2.3%. If the predictions prove to be true, this would be the two years with the weakest growth rates since the financial crisis, apart from the pandemic year 2020.
In Europe, the market conditions are also subdued. While leading experts believe that most advanced economies can avoid a serious recession, Europe is in a technical recession, which economists refer to as negative development of the gross domestic product (GDP) in two consecutive quarters. Nevertheless, S&P Global’s most recent forecast for 2023 sends a signal of cautious hope for Europe. In the GDP forecast for 2023, growth was raised by 0.4 percentage points from 0.5% in March to 0.9% in June, due in particular to the drop in inflation. Despite the increased forecast, however, the situation of the European economy remains tense and expected growth for 2023 at a low level.
And this is also reflected in the development of the German economy. With the GDP already having fallen for two consecutive quarters, a look at the second quarter of the year indicates that no major leaps are to be expected in the further course of the year. The ifo institute, for example, expects the GDP to decline by 0.4% this year, while the Kiel institute for the World Economy (IfW Kiel) anticipates a drop of 0.3% compared with the previous year, thus correcting its spring forecast (+0.5%) significantly downwards in June. Especially sparse private consumption and higher interest rates are burdening economic performance, which is confirmed by the recently published business climate index of the ifo institute. This has now fallen by 3 points in June, and thus for the second time in succession, to 88.5: the same level as last fall, when companies still feared serious consequences from a possible gas shortage.
Although business expectations for the coming six months are deteriorating, there is also some positive news, with leading experts predicting that the German economy will grow again in 2024. Current forecasts from the German institute for Economic Research (DIW) and IfW Kiel range between 1.5% and 1.8%.
As in the previous quarter, inflationary pressure in the euro area is decreasing. After 6.9% in March, the annual inflation rate is estimated at 5.5% in June. And at the same time, almost all EU member states are experiencing declining price levels. While the Eastern European countries of the euro zone reported the highest rates at just under 10%, Germany, with an expected annual inflation rate of 6.8%, recorded an increase of +0.3% compared with the previous month, mainly due to the rise in food prices.
The drop in the general price level in the euro zone is largely due to the falling prices for energy products, while prices for food, alcohol, and tobacco remain at a high level. This means that the lower rate of inflation so far has just a minor impact on consumers.
Currently, experts expect the general inflation rate to continue to fall and even drop to 2.5% within the next three years. The European Central Bank (ECB) is still playing an active role in this regard: in June, it raised the key interest rate by 0.25 percentage points to 4.0% to further curb price increases. This is the eighth consecutive interest rate hike since July 2022 and, as predicted by the ECB, probably not the last. After the preceding increases, a downturn in the investment propensity and purchasing power can already be observed. However, the full impact of the new interest rate hike will probably not be felt until the second half of the year.
In addition to the high price level and the reluctance to invest, it remains a considerable risk for the economy and the population that the energy supply may not be sufficiently secured for the coming winter. The announcement by the OPEC+ countries that they will cut their oil production in the second half of the year further underpins this risk. This may lead to a rise in oil prices and ultimately hamper growth in Europe. Furthermore, economic activities continue to be strained by geopolitical tensions. First and foremost, there is the Russia-Ukraine war, for which there is still no solution in sight.
After the high freight volumes and the corresponding capacity shortage of the last two years, the downward trend, which has already been felt since September 2022, is continuing. Especially in the first months of 2023, which were characterized by high energy prices, consumer restraint, high inventories, and low order intake, the market calmed down significantly, leading to a capacity surplus in the month of February for the first time since the summer of 2020. In March, there was still more capacity available in relation to freight demand but since the beginning of the second quarter, an increase in freight volumes or a decrease in capacity could be observed. This is in line with the typical seasonal trend in the road freight industry. TIMOCOM reported ratios of freight to available cargo space for May and June of 62 to 38 and 59 to 41, respectively. While this is well below the levels of the last two years, TIMOCOM’s transport barometer currently shows a trend similar to the pre-pandemic years.
As in the first quarter of 2023, diesel prices continued to fall in Q2. In March, Eurostat reported a weighted average of €1.66 per liter for the 27 European member states. In April and May this fell further to €1.57 per liter. Notwithstanding the ongoing ease in fuel prices, they are still at a higher level than in recent years.
This is reflected in the general freight rates for land transport: although spot prices have fallen significantly, at least year-over-year, the price index as a whole has remained at a constant high level since the beginning of the second quarter of 2022.
The latest political developments indicate that this price level will not fall in the near future, at least not in Germany. The current draft legislation of the German government, for example, provides for an increase in tolls on German highways and federal roads as of December, which will lead to a doubling of charges, at least for diesel trucks. Also in other European countries, e.g. Belgium, adjustments to toll rates are being introduced which will have an impact on freight prices in the short term. At this stage, however, it is not yet possible to fully assess the impact on the overall market.
Despite a steady decline in inflation rates, the economic situation remains tense. With consumer behavior remaining subdued and investment activity lacking, economic growth will be weak this year and also in the coming year according to current forecasts.
Compared with the last two years, the capacity development in the European road freight market clearly indicates a trend toward ample capacity, thus reflecting the persistently restrained market situation. In spite of the much-improved capacity bottleneck situation and falling diesel prices, the general freight rates remain at an undiminished high level.
Although the steadily decreasing price level raises hopes of an economic recovery, the restrained propensity to consume and investment does not permit any reliable forecasts for the coming months, which also makes it difficult to assess the development of road freight.
The next update, to be released in early October, will highlight the economic events of Q3 and the resulting impact on the road freight market. It will ensure continued open and transparent communication, which is a top priority for DHL Freight.