What inflation means for transport companies and their employees?

What inflation means for transport companies and their employees?

It’s not a secret that many analysts see in the current inflation crisis the symptoms of a looming recession: weak economic performance in the US, interest rate hikes and atrocious energy bills are all telling us that things are about to take a turn for the worst. Crucially, inflation and recession affect both, the people and the companies. Transport sector, together with construction and manufacturing industries, is incredibly susceptible to changes in the market. But given how important this industry, the recession will play a major role in the lives of transport sector employees. For instance, when 2009 came around with massive amounts of bankruptcies and layoffs, demand for truckers fell so much that a labor supply shortage turned into a surplus. In this article, we will explore why such a scenario might be more credible than you think.

As production costs increase, number of layoffs increases too

High inflation levels over extended periods are enough to send many once-profitable firms to the afterlife, and their employees into unemployment. However, this particular price increase - up to 41% in energy prices - is having a particularly acute impact on the road freight sector as energy and fuel costs seem to be rising without pause.1 As a result many small to medium companies are facing greater-than-ever production costs. To deal with it, some companies are increasing the prices of their services. Increasing the price at which you sell your services drives customers away, decreasing the income available to the company and forcing entrepreneurs to downsize their operations, usually by firing part of the workforce. This is even more serious when you consider the fact that clients of logistics companies are dealing with higher production costs themselves, thus paying more for transportation services is not easy. Now, we haven’t had periods of high inflation in Europe for some decades, but one can get an idea of how much firms tend to cut costs during crises by looking at historical data, such as the “Great Recession” in 2008-2009. In 2010 the number of unemployed workers increased 4 times compared to 2007, and long-term unemployment rate in the period of 2008-2011 increased from 20% to 60%.2 

COVID-19 had already been a source of worry for many in the sector, as quarantine measures effectively pulled the rug from under companies who suddenly found themselves having to deal with a reduced customer base due to a general decrease in demand for goods and services during the pandemic. The effects of the pandemic were heavy: ever since the start of it up until February 2022, 261 smaller hauler companies closed and because of it 773 employees lost their jobs.3 The situation continues to get worse when you consider the fact that every month at least ten transport companies close and this March the number increased to 27.4 This year the bankruptcy and liquidation levels have skyrocketed, leading to 594 companies going bankrupt in the first half of the year and 6400 being liquidated. 5 

The fact that our current situation can be compared to some of the worst crises of the last 50 years isn’t promising. However, it’s a fact that such high levels of inflation will drive demand for goods and services (such as trucking) way down, in such a way that it’s not hard to guess that a recession is around the corner, and it will be here to stay.

Massive layoffs and price increases in 2022

We mentioned previously that high inflation leads to recession. This is almost always the case if inflation remains at unnaturally high levels for unnaturally long periods: consumers’ income and savings will be drained more and more each month, driving them away from buying assets or amenities in a negative feedback loop. This is usually referred to as a decrease in aggregate demand. It immediately affects the logistics sector as more and more products are left to gather dust: if nobody has the money to buy the products, nobody needs to ship them, so nobody needs to load them onto a truck and haul them. This simple mechanism is the reason why work for truck drivers becomes harder and harder to come by as inflation feeds into a recession, and the reason why so many companies went bankrupt in periods when the demand for goods was low, like in the aforementioned 2008-2009 recession and the first months of the COVID-19 pandemic.  

Since the main ways of staying afloat involve either downsizing or shutting down temporarily, drivers and contractors usually get laid off en masse exactly at a time when the labor market is at its most strained: not just jobs for truck drivers, every job position will be in danger, thus making the task of finding a new source of income a near-impossible task even for skilled workers. Nevertheless, we can expect the freight forwarding sector to feel the effects of a recession first for the reasons explained above. As Tomas Seskevicius, the CEO of “TS GROUP” company, explained, firms like his own choose to hire and keep drivers “who are loyal, professional, fulfill theirs and their clients expectations and whose work quality and behaviour cannot be criticized”. Thus, when trying to prevent the risks of recession it’s important to possess these characteristics. 

Although big businesses may be less at risk due to having more clients, during the recession itself, all companies will decrease their working capacity since there is no reason to keep every driver on a full wage when there is no demand for said driver’s service, regardless of the size of the company. This means that even those employed by “safe” firms are at risk of losing their payroll.

The elephant in the room is that there is very little we can do to keep inflation levels under control unless the situation in Ukraine stabilizes. In essence, the current anomaly is being driven by excessive energy prices caused by the fear that Russia might shut down its supply of gas and oil to Europe as a part of its war effort.6 This is why gas prices will remain a nuisance for freight companies, as gas prices have only recently started to slowly decrease but still remain higher than last year’s average by approx. 40%.7  To make matters worse, Ukraine and Russia’s positions as key grain exporters have led to huge inflation levels even in terms of food and the most basic necessities.

It is clear now that the main driver of the upcoming recession is the interruption of the distribution lines of gas and oil, caused by the aggressive action of Russia in Ukraine. This means that there is very little governments and companies can do at the moment to control prices, and by proxy the economy, as the war shrouds every future possibility in a thick veil of uncertainty. In other words, there is little we can do as truck drivers and transport sector employees, except hold on to our seats, and brace for the worst. 
 

Kompanijų bankrotai ir užsidarymai

Sources:

1)https://www.eesc.europa.eu/sites/default/files/resources/docs/lithuania_etude_fin_lt.pdf
2)https://www.lrt.lt/naujienos/verslas/4/1604870/nuo-pandemijos-pradzios-veikla-nutrauke-261-mazuju-ir-smulkiuju-vezeju-imone
3)http://www.linava.lt/naujiena/41258/
4)https://scorify.ai/per-pusmeti-600-bankrutuojanciu-ir-8100-nauju-imoniu/
5)https://www.euronews.com/next/2022/08/17/record-inflation-which-country-in-europe-has-been-worst-hit-and-how-do-they-compare
6)https://tradingeconomics.com/lithuania/gasoline-prices

Keywords: work for truck drivers, work for long haul drivers, transport sector, recession, inflation, bankruptcy