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December 11, 2017
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Three global macroeconomic trends to watch

Comment
Supply chain managers should pay special attention to three trends that will reshape international trade and shipping patterns over the next decade, potentially altering supply chain dynamics.

For supply chain managers, there is no simple way to view the global economy. We are now seeing multiple, divergent macroeconomic trends that are likely to have significant implications for businesses over the next several years. These include falling oil prices, more stimulus from central banks, and a stronger U.S. dollar, among others. However, there are three global trends supply chain managers should watch closely. These trends will reshape international trade and shipping patterns over the next decade, potentially altering supply chain dynamics.

Slower growth in emerging markets
Chief among these trends is the slowdown of emerging market growth. The extraordinary growth of emerging markets—in particular the BRIC countries (Brazil, Russia, India, and China) during the 2000s—encouraged many U.S. and European companies to move manufacturing operations overseas. But during those boom years, many emerging markets failed to institute the necessary structural reforms that would enable them to transition to slower but more sustainable economic growth. As a result, economic performance in a number of those markets has rapidly deteriorated over the last few years.

Article Figures
[Figure 1] Export's share of world GDP
[Figure 1] Export's share of world GDP Enlarge this image
[Figure 2] Share of world consumption
[Figure 2] Share of world consumption Enlarge this image

China is maintaining relatively strong growth; last year real gross domestic product (GDP) growth was 7.4 percent, and this year it's projected to be 6.5 percent. Brazil and Russia, however, have entered economic recessions. Russia's economic performance is tied to the ups and downs of oil markets and is now seeing the impact of Western sanctions. Brazil's real GDP growth for 2014 was just -0.1 percent. Meanwhile, India faces much slower GDP growth due to declining fixed investment and productivity.

Real GDP growth in the United States averaged 3.2 percent between 1980 and 2007. Since the end of the Great Recession in June 2009, the recovery has been anemic, with real GDP growth averaging just 2.2 percent. In the European Union, the recovery has been hampered by the two-tiered growth performance of the northern and southern countries. The north is relatively economically stable, while the south is slowly digging out of a deep economic hole.

While IHS expects global real GDP to accelerate in 2015, globalization—defined as the value of world exports as a percent of global GDP—is not expected to follow suit. Over the past 20 years, roughly coinciding with China's acceptance into the World Trade Organization (WTO), trade growth has accelerated and outpaced overall economic growth; that is, globalization increased. This pattern ended with the recession, and trade as a share of of world GDP is expected to hold at around 30 percent, where it has been since 2010 (see Figure 1).

The combination of the slowdown in emerging markets and relatively weak U.S. and Western European economic performance has slowed world trade growth. International trade is expected to grow on pace with GDP.

Supply and demand balancing
In 2014, China's GDP represented 14 percent of global GDP, while the United States represented almost a quarter of global GDP. However, by 2024 China and the U.S. are likely to be even at about 20 percent each, which would balance global production more uniformly between East and West. Consumption patterns are expected to follow that shift.

U.S. consumers probably will continue to claim the highest percentage share of global consumption for the next few years, but emerging-market consumers are closing the gap. While its growth has slowed somewhat, the rise of China's consumer class is likely to propel the Chinese economy to a much larger share of global consumption over the next six to eight years, fueled by accumulated wealth and an increasing number of middle-income households (see Figure 2). In fact, IHS expects consumption in the BRIC countries to surpass that of Western Europe or the United States in 2022.

These changing international trade, production, and consumption patterns have several implications for global supply chain managers. First, the relative decline of the U.S. consumer's importance to global trade will serve to reduce production volatility. As producers become less reliant on one market they will be able to spread risk in a more balanced way.

Second, the major trading blocs are becoming increasingly connected and their performance correlated. At the same time that retailers are struggling for market share in the West, the growth of the middle class in China and India has slowed. A strategy that considers relative growth opportunities across multiple markets will enable global corporations to maximize their market opportunities.

Third, buyers will face competition from consumers in traditionally exporting countries. For example, the BRIC countries' production will increasingly be consumed within their domestic markets, and manufacturers there will view domestic markets as increasingly appealing relative to export markets. This will contribute to a reduction in economic globalization while reducing the export-oriented nature of production.

Production shifts
Several countries are showing promise as good locations for sourcing or as end markets. Chief among them are Mexico and Vietnam.

Mexico's increased competitiveness is helping the country regain its share of U.S. imports at China's expense. In 2001, China's entry into the WTO caused a major shift in trade, with China quickly outpacing Mexico in exports to the United States. Between 2001 and 2005, Mexico's share of U.S. imports of manufactured goods fell from 12.1 percent to 10.4 percent, while China's share rose from 11 percent to 19.2 percent. But Mexico staged a comeback. By 2009, China's share of U.S. imports had leveled off at around 26 percent, while Mexico's share grew to 13 percent by 2013. Proximity to the United States, lower relative wages, and the high cost of ocean shipping compared to the cost of utilizing an improved north-south transportation infrastructure between the U.S. and Mexico were primary factors in this shift.

China can no longer offer the kind of cost advantages that allowed it to become a dominant player in global manufacturing. Not only are labor costs rising, but there also is growing concern about broader macroeconomic and political risks, such as civil stability, "shadow" banking, a real estate bubble, and military adventurism. These factors have prompted Western companies to reassess their reliance on China.

This concern is also helping to drive growth in Vietnam, China's southern neighbor. The country has been a member of the WTO since 2007 and has manufacturing wages that are roughly half of those paid in China. These advantages have recently triggered a surge in manufacturing foreign direct investment and have led to a tenfold increase in the value of Vietnam's merchandise exports since 2000, with shipments in 2014 expected to have hit US $150 billion.

Positive implications
Changing global production and consumption patterns should have generally positive implications for global supply chains. On the consumption side, a more regionally balanced demand for goods will reduce dependence on any one market and lower overall supply chain risk. On the production side, the emergence of regional manufacturing centers—in Mexico, Vietnam, and elsewhere—will distribute and perhaps minimize the risks for downstream manufacturers, distributors, and other members of the global supply chain. These benefits will be mitigated by trade growth that is closer to the growth in overall economic activity. Look generally for shorter and more diverse supply chains going forward.

Chris G. Christopher, Jr., Ph.D., CBE is executive director of the U.S. Macro and Global Economics practice at the research and analysis firm IHS Markit. Ryan Siavelis is a transportation analyst at the research firm IHS Economics.

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