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.
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.