MACROECONOMICS
Quarterly overview of the majordevelopments on the macroeconomic landscape
Double-digit year-on-year global air cargo demand growth has been fueled by the Red Sea conflict and a surge in low-value e-commerce.
But this is relative to a weak base in 2023 and the factors driving growth in 2024 seem to be either short-lived or insufficient to continue reviving the global air cargo market to its pre-pandemic level.
However, the global manufacturing Purchasing Managers’ Index (PMI), which measures the sentiment in the global manufacturing sector, offers some hope.
In March, the global PMI rose to its highest level (50.6) since July 2022 (source: S&P Global).
Its sub-index for new orders, which indicates future manufacturing output and trade volumes, also increased for the second consecutive month.
Notably, global new export orders registered its smallest decline in 25 months.
This is a forward-looking barometer for international trade and air cargo demand, suggesting a potential imminent return to growth, albeit from a low base.
Global new orders were particularly strong for intermediate goods, followed by consumer goods, which is supported by businesses having now rebalanced inventory levels following the overstocking witnessed during Covid-19.
However, new orders for investment goods, such as durable machinery, remained weak, suggesting that companies are still cautious about potential expansion risks.
Increases in production output were observed in multiple economies, including India, China, the US, Mexico, and Spain. On the other hand, Japan and most of the EU region, especially Germany, continued to face challenges.
Weak manufacturing activities in the EU were mirrored in its retail sales figures.
Despite the slowdown in inflation, EU consumers were reluctant to shop, with Eurostat's latest report from February showing a year-on-year retail sales decline of 0.2%.
In contrast, US consumers continued to spend. Retail sales grew 4.9% year-on-year in February, outpacing the US Consumer Price Index (CPI) growth - a key gauge for inflation - which is up 3.2% from the previous year.
The US economy continued to strengthen in March with the latest US CPI heating up further to 3.5% year-on-year, while the unemployment rate fell from 3.9% in February to 3.8% in March.
Middle East conflict raises trade concerns
Conflict in the Middle East has escalated in recent weeks following a strike on an Iranian embassy in Syria and retaliatory drone attacks against Israel on Saturday, 13 April.
Flight cancellations and delays were reported following the drone attack due to airspace closures in Iran, Iraq, Jordan, Lebanon and Israel.
Although airspace reopened on Sunday, many airlines continued to cancel flights or avoid flying through the region.
Ocean freight has also been impacted by the conflict, with Iranian military forces seizing the container ship MSC Aries near to the Strait of Hormuz.
This has raised safety concerns for ships sailing through the area which is a critical gateway to the Arabian gulf and ports in UAE and Qatar, particularly for sea-air services from Asia to Europe.
If this situation escalates further, jet fuel prices could surge in response to a potential increase in crude oil prices, as was witnessed at the start of the Russia-Ukraine war. However, so far there has not been a spike in oil prices.
Air space closures are unlikely to significantly impact existing flight corridors between Asia and Europe because, unlike the situation in Russia and Ukraine, alternative routes have been established via the Black Sea, Caucasia area and central Asia.
Any prolonged conflict could raise concerns about the viability of the current sea-air route via Dubai, with goods arriving via ocean from Northeast Asia for onward transportation via air to Europe and North America.
Increasing use of sea-air routes has been prompted by shippers attempting to avoid disruptions to ocean freight services in the Red Sea.
If there is a widening of conflict in the Middle East, they may be forced into a complete shift from ocean to air transportation.
