An era of unilateralism

posted on 9th April 2019
An era of unilateralism

IATA’s downgraded 2% growth forecast reflects a shift away from global multilateralism, explains chief economist Brian Pearce

IATA’s decision to downgrade its 2019 growth forecast from 3.7% to just 2% reflects a shift away from an era of global multilateralism to a new period of “aggressive unilateralism” that has been contributing to air freight’s stagnation in the last 12 months, according to the association’s chief economist Brian Pearce.

While IATA recorded a headline overall growth rate in FTKs for 2018 of 3.5%, Pearce notes that once this figure is seasonally adjusted, it becomes clear that all of the growth had taken place by January 2018. Since that point, the industry-wide FTKs have not grown – and in fact in the last few months of 2018 experienced some contraction, on a year-on-year and month-non-month basis.

“The hard reality of the last 12 months is that we’ve actually seen no growth in industry-wide volumes at all,” says Pearce.

Explaining how the average for 2018 was still 3.5% higher than the average for 2017 despite there being no growth after January 2018, he told CAAS that this was “because of the profile: fast growth through the second half of 2017 until it stopped in January 2018”. He confirmed that although there had been several months of year-on-year monthly growth between January 2018 and last autumn, FTK levels never exceeded the FTK levels of last January.

He said that the current weakness is also quite widespread – all the major trade lanes show a consistent picture of the slowdown. And in the the last few months, particularly in Asia – which is considered the bellwether for the industry, being the manufacturing and assembly hub of the world – has shown particular weakness.

A key indicator – export orders – remain in negative territory, with the expectation that they will shrink further, Pearce says. With export order data typically preceding movement in air cargo by two or three months, Pearce says the impact will still be felt for some months to come.

Beyond restocking

This manufacturing contraction is partly due to the restocking cycle that unexpectedly peaked in 2017, driven by businesses around the globe that were surprised by a surge in demand. This, of course, led to a very good year for air cargo in 2017.

But Pearce notes that not only has this cycle ended, but “it’s clear in the last 12 months that the situation has gone beyond the typical industry restocking cycle – it’s more than that.”

Problems with world trade rather than general economic weakness are behind this. He notes that GDP growth is still in “pretty good shape”. The issue, he says, is that “cross-border trade is weakening sharply; that’s what’s damaging our business in air cargo.”

He also highlights that this year’s cargo growth forecast downgrade to 2% growth, “is quite significant”. Pearce says this is in a large part due to what has happened already from late 2018 into early 2019.

The outlook for the rest of the year and five years that IATA has projected are based on the trade situation not getting any worse and based on world trade figures forecasting global growth of 3.5% this year.

“Our projection – 2.0% this year and 4.4% on average over the next five years – is based on air cargo outperforming world trade, reflecting the increasing impact of structural changes like e-commerce, which favours air cargo over other modes of transport,” Pearce notes.

“But obviously if we see a deterioration of the trade situation – and I don’t think we are out of the woods yet – we could see a weaker trade environment.”

He highlights there could be other trade disputes, not just between the US and China, but Europe being pulled into US issues over auto components – an important air cargo product.

“It does look like we are on a cusp of a deal between the US and China, but we need to have open eyes on the trade-policy situation,” he adds.

“We are in a different world today, post-global economic crisis: aggressive unilateralism rather than the multilateralism the world pursued some time ago.”