Global trends - Economics

How will political and economic trends impact global freight markets in 2019?

February 11 2019

The year that just ended was full of challenges and uncertainties in both the political and economic realms. We are expecting 2019 to bring more clarity after a few months of blurriness. In 2019, politics seem to be becoming increasingly more important in determining the outcomes of international trade flows: this year will probably confirm that the trade game is played in the political arena as much as in the economic one.

All eyes will be on the unfolding of the so-called US-China trade war. The impact on international trade of a full-blown war would be massive: it could shave 0.7% off of global GDP, amounting to an eye-popping USD 5.6tn. No wonder players in the shipping industry are trying to figure out what will come after the difficult cycle of 2018, which was partially compensated by the somewhat positive tone of the last China-US trade negotiations.

Additionally, the UK disorderly exiting the European Union (EU) could strongly impact trade and just-in-time international supply chains. March 29th, 2019, the date at which the UK is set to leave the EU, will probably be postponed, to let countries prepare a ‘second’ withdrawal deal. Although this will ease fears of an immediate no-deal Brexit, it will prolong the period of uncertainty.

theresa-may-brexit

Finally, the European elections in May (the first ones not including the UK) will tell the world more about the political trends in the region. While questions about the future of European integration have been rising, this vote will tell a lot about what the EU will look like in the coming years. This will surely impact trade and transportation rules in Europe. The Mobility Package is set to be a major issue during the campaign, driving a lot of the debate.

Digitalization makes players more agile and better equipped to deal with uncertainties. Additionally, increased sustainability standards help them cope with natural risks in the long run. 2019 will be a critical year in building sustainable supply chains. The International Maritime Organization’s (IMO) Sulphur plan set a new limit of 0.5% m/m for Sulphur fuel oil used on board ships, which has to be complied with by January 1st, 2020. This will bring changes to the oil market since there will be a gradual decrease in the production of high-sulfur fuel oil. The changes will also push ocean freight forward, as it seeks cost saving solutions. And we’ve already noticed players making moves. The extended agreement of the Ocean Alliance with a new loop connecting Asia and Europe, could contribute to reduce the rates raise linked to the new regulation. With the deadline being set, we are going to see some new dynamics in the ocean freight market.

At the policy-level, an application deal was reached to implement the Paris Agreement. Member countries will need to meet the carbon-emission target by 2020. As a result, they will need to either introduce or revise domestic regulations on carbon emission under the framework of the Paris Agreement. Overall, 2019 will provide great opportunities for the development of a low carbon emission freight industry.

After a weak 3rd quarter and a lackluster 4th quarter, the global economic dynamics might see some improvements in 2019, although the first half of the year is likely to be challenging. The above-mentioned political uncertainties are partially to blame for the current sluggishness of the global economy, but they can’t account for all of it. Consider, for example, the long streak of dynamic economic activity in the US. This positive cycle, which has been going for almost 10 years, is second only to the 1991-2001 growth cycle. Some kind of ‘economic correction’ might hence be overdue. China, another example of an extremely long growth cycle is also showing signs of slow down. Thus, we are starting 2019 with the two largest world economies on the verge of economic downturns. By mid-2019, however, we expect Chinese policy makers to stabilise as policy authorities try to stimulate the economy with fiscal and monetary incentives. In the meantime, US Federal Reserve Bank interest rates might have a slower increase than originally planned. This would probably create the conditions for a better second half of the year for the global economy.

The global economic cycle could therefore trigger a slowdown in international trade flows in the first half of the year (starting with European trucking) and support a new acceleration in shipping activity in the second half of the year, and into 2020. However, this would mean that increased rate volatility might be in the cards for the players in the shipping industry.

All in all, 2019 is set to be, in many respects, a game-changing year. All the aforementioned issues will have a direct or indirect impact on the logistics industry. Let’s wait and see, and, look on the bright side!

Credit  photo: Dreamstime

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PhD in Political Science, Ganyi gives a sharp look at the evolutions of the global Supply Chain industry through the prism of the political and economic context.