For years, our biggest lament and recurring confirmation that unorthodox monetary policies are simply not working, has been tracking global trade - the lifeblood of any properly functioning global economy - which has not only failed to reach its pre-crisis growth rates, but especially over the past 2 years, has seen slowing dramatically. The latest evidence of this slowdown came earlier today when the International Air Transport Association (IATA) reported that demand for global air freight, measured in freight tonne kilometres, fell another 2% in March on subdued growth in world trade.
Specifically, the IATA said that air freight volumes declined in annual terms for the second consecutive month in March 2016, and rounded out the weakest opening quarter of the year since 2012.
While the IATA is somewhat hopeful that growth should pick up in the coming months as the US seaport disruption drops out of the annual comparison, it notes that the "broad signs of softness mean that 2016 is shaping up to be another weak year for air freight." Even muted optimism was hard to find in the statement of IATA Director General Tony Tyler who said that "expectations of purchasing managers gives little optimism for an early uptick. The combination of fierce competition, capacity increases and stagnant demand makes this a very difficult environment in which to generate profits."
The reason for ongoing deterioration in trade - lack of demand: industry-wide capacity has continued to grow strongly as demand has fallen, keeping intense pressure on yields. Available capacity rose 6.9% in the month, meaning that load factors - how full planes are - fell by 4.0 percentage points to 43.5%.
- Global air freight volumes fell by 2.0% year-on-year in March 2016, and by a similar amount across the first quarter of the year combined. (Note that the latter period includes a boost from the leap year: adjusting for the extra day in February, freight volumes in Q1 this year were closer to 3% lower than in Q1 2015.)
- The annual decline in volumes in Q1 was driven overwhelmingly by North American and Asia Pacific carriers, both of whom enjoyed strong boosts to transpacific air freight at the time of the US west coast seaport disruption in early 2015. (See Chart 1.) Modest year-on-year increases in FTKs flown by European and Middle Eastern carriers provided a partial offset for total FTKs. (Again, see Chart 1.)
But the punchline, and the main driver for the global trade slowdown, is mostly one. Yes, everyone knows it is the result of major economic problems in China which have depressed Asian trade with North America, but we doubt anyone knew just how bad it was. According to IATA, the latest available data by route show that air freight volumes across the Pacific – the largest market in terms of air freight tonne kilometres (FTKs) – were almost 15% lower during the start of this year compared to the same period in 2015 (Chart 2.)
Some other observations: the underlying backdrop for air freight remains weak – not least because wider global trade growth remains subdued. World trade volumes have grown by just 0.8% in annual terms so far this year. Admittedly, annual trade growth may pick up sharply over the coming months, as the annual comparison is flattered by the downward trend in volumes seen during the first half of 2015. But the key point is that the current upward trend in global trade volumes is very modest (around 1.5% in annualized terms since the middle of last year). Tellingly, world trade volumes in February were only 0.4% higher than at the end of 2014. Moreover, the export orders component of the global Purchasing Managers’ Index – a closely watched business survey which has a long-standing relationship with growth in air freight volumes – remained in contractionary territory for the second consecutive month in March.
All told, 2016 is shaping up to be another year of disappointing growth for air freight. Even if FTKs grow in line with their five-year average rate of around 1.5% over the rest of this year, given the poor start, overall volumes would still only expand by 0.6% in 2016 as a whole.
Unfortunately, that priced to perfetion 0.6% trade growth in 2016 - which is a borderline contraction if even one exogenous shock kicks in- will not support the much needed 3.0% global growth, and means that