There may be a bumpy road ahead for air cargo as geopolitical tensions give rise to border friction, writes Brian Pearce, IATA’s Chief Economist.

Brian Pearce: Looking into the crystal ball

Air cargo, measured by freight tonne kilometers (FTKs) flown, grew 3.5% in 2018. That was considerably slower growth than the 9.7% expansion of 2017.

In fact, by the end of last year the earlier expansion had slowed to a halt and the level of FTKs flown in December was 0.5% lower than volumes the previous year. A key issue for the industry is whether these end year results are an indication of how 2019 is going to turn out.

The shape of air cargo demand over the past two-and-a-half years has been determined to a large extent by a typical business inventory restocking cycle. Businesses were caught out by the strength of the economic upturn in late-2006, as China unexpectedly boosted its economy followed by tax cuts in the US. As a result, inventories fell to uncomfortably low levels relative to sales. Shippers then turned to air cargo to rapidly restock. Accordingly, air cargo’s share of world trade increased from late-2016 until mid-2017.

As inventories reached higher levels shippers started to switch back to slower, cheaper modes of transport. Air cargo lost market share from mid-2017 until late-2018. This was a classic inventory stock cycle, which the industry has seen over past decades.We expected normal trends to resume thereafter. But the modal shift story has changed to one of overall world trade weakness.

Weak export orders point to a further decline of trade—World trade forecasts for 2019 have started to be revised down and now stand at around 3.5%, but that may not be the end of downward revisions

Our December forecast for 2019 of 3.7% average growth in freight tonne kilometers flown was based on growth in overall world trade of 4%. That acceleration in world trade growth, from 3.2% last year, now looks highly optimistic given that trade stopped growing at the end of last year as can be seen in the chart. Weak export orders point to a further near-term decline of trade in manufactured goods. World trade forecasts for 2019 have started to be revised down and now stand at around 3.5%, but that may not be the end of downward revisions.

The reason for this halt in trade growth is not because of weakening demand in the major economies. At the end of last year domestic demand and the global economy continued to expand at a good rate. The fall in trade looks like the growing impact of border frictions. The cross-border trade environment has certainly deteriorated, with tariffs imposed on US-China trade and further increases threatened. There is a serious risk of trade disputes with other regions.

These explicit barriers to trade come after a decade of soft protectionism that combined with other factors to halt the rapid growth in world trade. Whereas trade and air cargo volumes grew for decades at twice the pace of GDP, as supply chains and globalization extended, for the past decade trade has barely grown in line with the global economy. At this stage it is not clear whether trade disputes will be resolved or escalate. What we have seen so far suggests our December forecast is now too strong.

The arithmetic also points to a downward revision of our FTK growth forecast because there was no growth over the 3-6 months up to the end of 2018. To keep our December forecast of an average 3.7% growth in 2019, FTKs would have to expand by more than 7% between January and December. To produce an average 2019 growth rate of 2% would take a 4% rise during the year which, in the current climate, looks the best we can expect.

A new forecast for global air FTK growth, which builds on this analysis, will be released at the World Cargo Symposium.