By Justinas Liuima,
Senior Industry Analyst of Euromonitor International
2016 was marked by increased political uncertainty and business volatility, which hindered the performance of the logistics industry. A period of high uncertainty is expected to continue in 2017, but, despite this, global growth is anticipated to accelerate.
Global real GDP growth is forecast to reach 3.4 % in 2017, thanks to accelerating growth in emerging markets in Asia Pacific and Eastern Europe and better-than-expected growth in the EU. This is anticipated to translate into new opportunities for logistics providers, with the logistics industry forecast to grow by 2 % in 2017, in comparison to the decline of 0.3 % registered in 2016.
Yet, despite improving economic growth, business and consumer confidence remains fragile. Political instability in Europe, fear of free trade restrictions and terrorism will remain the key issues constraining business confidence and the logistics industry’s growth in 2017. However, the introduction of new transportation modes and redistribution of trade routes at the same time will provide new opportunities for logistics providers operating on Europe-Asia trade routes and within the EU.
Recovering EU, China and India will drive Europe-Asia trade growth
Traditionally, Europe-Asia is expected to be one of the largest and most promising trade routes on the global level. The EU is expected to sustain growth momentum, with real GDP forecast to grow by 1.5 % in 2017. This growth is associated with increasing manufacturing production in the EU and expanding exports, particularly in Germany, as well as Scandinavian, Central and Eastern European countries. For the logistics industry in Europe, this means more trade in industrial goods. Moreover, growing manufacturing is expected to translate into lower unemployment levels and stimulate demand for fast moving consumer goods transportation.
Real GDP growth in China, on the contrary, is expected to slow and stand at 6.4 % in 2017. However, this is not likely to impact European manufacturers and the logistics industry as private consumption remains on the rise and is boosting demand for various consumer and designer goods. For example, European countries are among China’s key import partners in the apparel and footwear, home furnishings and consumer electronics industries. Growing private consumption is expected to sustain demand for European designer goods in 2017 and offer growth opportunities for logistics providers.
EU remains China’s key import partner of luxury goods
Besides China, India is expected to emerge as one of the key players on the Europe-Asia trade route in 2017. India’s real GDP growth is forecast to overtake China’s and expand to 8 % in 2017. More importantly, India has managed to attract new investment from foreign manufacturers. For example, European automotive companies BMW, Daimler, and Peugeot, amongst others, are investing into production facilities in India. The automotive industry requires long and sophisticated supply chains; thus new opportunities for multinational as well as Indian logistics providers will emerge in 2017 and beyond.
Kazakhstan to benefit from growing railway trade between Europe and China
2016 was a breakthrough year for the Trans-Asian railway, connecting China with major European cities. A number of infrastructure projects were completed or under construction during 2016, with trade flows via railways expected to increase even further in 2017. For example, a new train line connecting London and China, carrying consumer and designer goods, was launched in early 2017.
Railways are becoming an attractive alternative for logistics companies, as rail transportation costs less than air transportation, and is faster than shipping. For example, it takes 15–16 days for a train to travel from China to Europe, in comparison to upwards of 30 days when goods are shipped. Time savings are particularly relevant for consumer and designer goods retailers in both Europe and China.
This also provides new opportunities for countries standing on the crossroads of Europe-China trade. Kazakhstan, for example, is becoming an important player on the new Silk Road. Kazakhstan Railways claims it operates 11 routes in China and aims to increase China-Europe trade flow to USD 800 billion. Growing trade flows are benefiting Kazakhstan’s logistics industry, as the country is becoming an important logistics hub for goods carried on the Trans-Asian railway. In 2017, Kazakhstan’s logistics industry is forecast to finally recover from slumped trade flows with Russia seen during 20155–2016 and expand by 8 % in value terms.
Brexit to have little impact in 2017, but it will change trade routes in the long term
Contrary to expectations, the logistics industry in the UK expanded by 4 % in 2016 as the depreciation in the pound sterling helped to increase exports. In 2017, UK logistics growth is expected to remain sluggish, with the industry expanding by just 0.4 %, as expanding exports will not completely offset shrinking private consumption.
Brexit itself will not completely eliminate trade volumes in Europe, but it could redistribute supply chains and distribution channels in the long term. Key British manufacturers, which export a large share of production output to the EU, are eyeing Central and Eastern European countries to relocate their production to. For example, aerospace company Rolls Royce is investing in Poland while automotive producer Jaguar Land Rover is building a new factory in Slovakia.
Business and Consumer Confidence in the UK on Decline
Such a situation means that the supply chain for various components, such as plastic and rubber parts, glass, electronics and others, will change, with demand shifting from the UK to Eastern Europe. The logistics industry is already witnessing changes in the supply chain, with Poland and Slovakia boasting some of the fastest growing logistics industries in Europe in 2017.
Top 10 Logistics Industries in Eastern Europe (Excluding Russia), 2017
Besides manufacturers, UK retailers and fast-moving goods carriers are also preparing for possible changes in distribution channels. In order to avoid double taxation and constraints in the transportation system, UK retailers are considering relocating their distribution centres to the EU. Germany and the Netherlands, having an excellent logistics infrastructure, are most likely to attract new investments. However, no significant changes in distribution chains are expected in 2017, as retailers are waiting for Brexit negotiations to end, and hopes that some sort of free trade agreement with the EU will be reached remain.
Russia and Turkey to provide alternative trade routes with Asia and the Middle East
Russian logistics industry has been particularly hit by Western sanctions and shrinking commodities prices, which have disrupted established supply and distribution chains and led to an economic downturn.
However, Russian logistics industry is set to recover and post a modest growth of 2 % in 2017. Western sanctions are likely to remain throughout 2017; however new trade routes with China are expected to improve the situation. Trade flows between Russia and China stood at just USD 50 billion during the first three quarters of 2016 (down from USD 100 billion in 2014), but both countries aim to increase bilateral trade to USD 200 billion by 2020. Despite slowing growth, China still needs vast amounts of energy resources, as well as various commodities and agricultural goods from Russia. Western sanctions, meanwhile, are forcing Russia to search for alternative trade partners. As a result, Russia is increasingly importing machinery, vehicles, consumer electronics and other goods from China, which is helping to establish new trade routes and lift Russian logistics industry.
Turkey will be another key market for the logistics industry, providing alternative trade routes. Improving trade flows on the New Silk Road and Trans-Asian railway have placed Turkey in an excellent position, as it stands on the crossroads between Asia and Europe. Moreover, Turkey hopes to sign a free trade deal with the UK after Brexit and boost bilateral trade flows between the two countries. Lastly, civil war in Syria is disrupting trade flows in the Middle East, with Turkey potentially emerging as a new logistics hub. For example, in 2016, Turkey and Jordan signed an agreement to export Jordan’s goods to Gulf countries via Turkish ports.
Nevertheless, high political uncertainty and deteriorating business conditions in Turkey will constrain the logistics industry’s growth in the country. Despite improving transit flows, Turkey still relies heavily on domestic consumption; thus, declining consumer confidence, rising inflation and stalling business investments will hurt consumption and the logistics industry. In 2017, Turkey’s logistics industry is forecast to expand by 5 %, although this will be slower than the growth levels witnessed over the last five years.