Forecasting port traffic the safer way: Basing traffic forecasts solely on GDP can be inaccurate

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Authorship

Graham Cox, Director, Maritime Traffic Forecasts Ltd, Hothfield, Kent, UK

Publication

There are two traditional methodologies that have been used to forecast port traffic volumes; one based on GDP and the other on desk and field research.

Each has advantages and disadvantages, but both miss the big picture and lay themselves open to major error.

The GDP approach

This approach is based on the logical assumption that a variety of economic drivers determine demand for port cargoes.

In practice, this fundamentally correct principle has been dramatically simplified to apply only the GDP trend to determine traffic, as if GDP accurately measures the impact of all economic drivers on particular cargoes or ports.

Under this approach, a historic relationship between cargo and overall GDP is estimated (for example, cargo grows at 1.5 times GDP growth) and that multiplier is applied to assumed GDP growth in the future to show how traffic volume will develop.

Analysts sometimes apply an extra multiplier if, for whatever reason, they think trade in the future will grow faster, but this introduces considerable subjectivity and is hard to audit.

This effective ‘dumbing down’ of forecasting in the maritime industry may have occurred because of data problems in general and because the GDP approach has been an appropriate simplification for containerized trade route traffic; given that there is no information about the nature of the cargo within the boxes.

Unfortunately, analysis based predominantly on GDP trends has become the norm for all cargo types and right down to the port level.

The large majority of forecasts produced for the liquid and dry bulk trades follow the same simple GDP methodology.

This has happened despite the availability of data on other economic drivers and more accurate information about the volume and make-up of port trade; even in some cases for containerized traffic.

There is no fundamental statistical or economics justification for analyzing trade simply in terms of a relationship with GDP.

Richer statistical methodologies reveal underlying relationships with the drivers of this type of traffic that GDP cannot capture.

It is potentially deficient, if for no other reason that it ignores the effect on traffic flows that different sectors of the economy can exert:

such as construction or the retail trade.

For example, one sector may experience a sustained downturn in activity whilst the overall economy remains strong; after having run at a similar rate for decades.

This development will have a materially different effect on traffic flows from that indicated by GDP if that sector’s imports or exports constitute a significant proportion of cargoes.

Use of a GDP driver alone will always distort if different sectors are of differential importance to traffic and are growing at significantly different rates.

Figure 1 illustrates the differing rates of growth in the sectors of the UK economy between 1970 and 2008.

The years in which there was a downturn in the economy are shown as vertical lines.

Just as important as the differential sectoral patterns in a port's hinterland are the sectoral developments in its main country trading partners.

Use of simple GDP trends for foreign countries can introduce bias and risk incomplete analysis if developments within partner countries’ economies are not  considered.

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