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Navigating Economic Recession: The Impact on Global Supply Chains

Updated: May 9


RECESSION - GRAPHICS

The Impact of Economic Recession on Supply Chains


Halfway through 2023, the future of the global economy remains uncertain, with experts divided on the likelihood of an economic recession happening this year, as reflected in the latest World Economic Outlook report from the World Economic Forum. In a survey cited in the report, experts were evenly split on the outlook for the economy, with 45% saying a global recession this year is likely and 45% saying it is unlikely(1).


As conceptualized by Nobel Prize-winning economist Joseph Stiglitz, during an economic recession, there is a sharp and prolonged decline in output and investment, accompanied by a deterioration in labor market conditions. During this period, aggregate demand is reduced, leading to a decline in output and income. There is also an increase in the unemployment rate and a shortage of available job opportunities.


The COVID-19 pandemic caused the worst global economic contraction since the Great Depression of 1929. In 2020, the world economy experienced a contraction of 3.1%; in contrast, after the global financial and economic crisis of 2008-2009, the world economic decline in 2009 was -1.3%(2).


Faced with the prospect of crisis several governments took counter-cyclical measures to boost the recovery, by injecting money and increasing capital circulation. Strong monetary measures were taken In view of the global inflation caused by these cash-flow injections, the disruption of global supply chains, Russia’s invasion of Ukraine, the increase in energy prices and the relationship between international energy and food prices. The central banks raised their interest rates to mitigate and curb inflation.


An economic slowdown in 2023 was no surprise, but concerns about contagion in the international financial system increase even more after the Silicon Valley Bank collapse in the United States. In the big picture, data indicates that the United States, the European Union and countries such as Mexico have begun technical recessions, while China is not experiencing the strong post-pandemic recovery that some had anticipated.


The World Bank (WB) forecasts that global economic growth will slow to 2.1% this year before a modest recovery, up to 2.4%, next year (3). The Organization for Economic Cooperation and Development (OECD) shows a more positive outlook than in its previous report; forecasting global GDP growth in 2023, reaching 2.7%, the lowest annual rate since the last global financial crisis, barring the pandemic period in 2020. A modest improvement is also forecasted for 2024 as inflation moderates and real incomes strengthen, with a projected GDP of 2.9% (4).


For his part, Mohamed El-Erian, chief economic advisor at Allianz and former managing director of PIMCO, has stated that he does not believe a recession is inevitable in 2023. He argues that the U.S. economy remains fundamentally strong and that the Fed is likely to be able to achieve a soft landing. He points to the fact that the labor market remains active and that consumer spending remains solid. He also asserts that the U.S. Federal Reserve has the tools it needs to manage the economy and avoid a recession.


Meanwhile, Richard Koo (chief economist at Nomura Securities), and Larry Summers (former U.S. Treasury Secretary and Harvard University professor), point out that the U.S. economy has a long history of resilience and has been able to weather previous economic storms. It is worth mentioning that in the event of an economic recession in the U.S., there is a possibility that this could be combined with high inflation, which could result in a stagflation scenario (a combination of inflation and economic stagnation).


The International Monetary Fund (IMF) expects growth among developed economies to fall from 2.7% last year to 1.3% to 1.4% this year and next year (5). The war in Ukraine will have its greatest impact on Europe, but slowdowns in this region (and some possible shutdowns in China) are likely to have a lingering side effects on the global economy.


Germany, France, Italy and the UK have all fallen into recession or close to it as inflation affects household consumption and the higher cost of capital dampens investment (6). In Europe, the IMF expects weak or very weak economic growth in 2023. The regional outlook continues to be tilted to the downside, involving scenarios such as a possible intensification or prolongation of the Russian invasion in Ukraine, an increase in inflation due to tighter monetary policies and tensions in the financial sector (7).


Similarly, according to the consensus of economists surveyed by Bloomberg, the economies of North America, Japan and South Korea are expected to slow next year (8). Meanwhile, personal consumption in New Zealand has already fallen and economists project a contraction over the next four quarters. Economists anticipate that Australia will avoid a recession, though growth will slow to low levels.


Nor are favorable rates seen in the G-8, with real GDP growth of less than 1% for this year, rising to just 1.8% by 2025. Both the UK and Germany face economic challenges. The UK's GDP is on the brink of recession and Germany's output has declined in three of the last four quarters. Both economies are suffering from high inflation, with the cost of food in the UK rising 19% in April, and in Germany, almost 15% in May. With such high inflation, markets expect the Bank of England to raise its interest rate from 4.5% to 5.5% by the end of the year(9) , which could negatively impact demand and investment in developed economies. This situation could also have a knock-on effect on demand for raw materials and manufactured goods in emerging economies, while higher interest rates would increase the costs of accumulated debt in emerging markets. Thus even if developed economies were to avoid a slowdown in growth or a recession, the recovery from the inflationary shock and financial constraints is unlikely to reverse the lowest growth trend seen in recent decades.


The IMF's World Economic Outlook June 2023 report notes that Asia is expected to experience more favorable economic activity. In terms of the region's growth forecast, China stands out after its reopening from roving COVID-19 lockdowns. In turn, India is positioned as the fastest growing economy in the world. Although it had a slowdown in the first quarter of the year, India is expected to gain momentum and average 6.25% growth through 2025 (10).


How do recession fears impact the supply chain?


The pandemic affected the global supply chain dramatically: but after two years of fluctuations in demand, the freight sector is now slowing down. Trucking companies and independent drivers are adjusting their contracts and pricing structures to remain competitive and to keep their fleets operational in this new low-demand landscape.


For its part, the impact of inflation on the global supply chain can be significant and extensive. Rising input and financing costs, coupled with changes in consumer behavior and trade patterns, create a ripple effect on supply chains globally, affecting demand for specific products and industries (11).


"With consumer demand remaining persistently sluggish for the peak season, elevated inflation levels are poised to exert an additional detrimental effect on demand," commented Christian Roeloffs, co-founder and CEO of Container xChange. With this, companies must adjust their production, inventory management and distribution strategies accordingly.


According to Anthony Smith, chief economist at Freight Waves, we are in the early stages of a freight recession in terms of volume. Year-over-year purchases are down more than 20% (12) and will be more pronounced and evident to everyday consumers than the freight recession in 2019. From their point of view, we are now experiencing the effect of the oversupply that emerged during the pandemic, when there was a huge demand for goods and many people entered the logistics market. With the decrease in demand, contract rates are declining as well as spot rates. In short, there is significant downward movement in demand on the international shipping side.


Overall, ocean bookings for U.S.-bound cargo have declined significantly, cargo movement from warehouses to stores is slowing down; and this week's GDP report showed inventory investment has declined in the first quarter as fewer companies restocked.


Ocean freight orders are a leading indicator of rail and truck revenues as 90% of world trade moves by water. Marine bookings have declined with manufacturing orders trending down 30% to 40% since June of 2022. This decline negatively impacts profits in both trucking and rail, where revenues are generated by moving goods, so the latter sectors have also seen weak performance and a slowdown in cargo volumes. The decline in maritime orders means fewer goods coming into the U.S. to be transported, affecting labor in places like California where truck drivers are being laid off due to lack of container volumes.


According to Container xChange's June forecast, there has been a persistent drop in container prices, accompanied by supply chain disruptions such as the Panama Canal drought, labor strikes on the U.S. West Coast and a technical recession in the Eurozone. The forecaster also predicts a further drop in container prices in the coming weeks, with no signs of a demand revival.


In the face of economic uncertainty, Western importers continue to destock and delay restocking as interest rates continue to fluctuate. Anthony Smith, CEO of Freight Waves, identifies that inventory levels within his index stand at 67.6%, well above the 50% threshold for growth. There is continued expansion in inventory levels, and they have started to see inventory holding prices decrease slightly. Those prices, on a scale for LMI, are at 75%, so they remain elevated well above that 50% threshold (13). In fact, inventory levels continue to grow and warehouse storage costs remain high. The index shows a slight downward shift, but warehousing may remain very high over the next 12 months.


The more developed economies in the West continue to transition their dependence away from Chinese production plants and mineral resources in the global south, the more government investment in new infrastructure, as well as industrial policies that create new opportunities and partnerships, become key to an economic rebound.


Conclusion


The future of the global economy is uncertain and there are divided opinions among economists about the global economic recovery in 2023. While some experts predict a possible global recession, others argue that it is unlikely. The COVID-19 pandemic has caused an unprecedented global economic contraction, and while countercyclical measures have been implemented to boost recovery, factors such as inflation, supply chain disruptions and geopolitical conflicts continue to pose significant challenges. While some countries show signs of economic slowdown, others still maintain moderate growth. Overall, a modest recovery in global economic growth is expected, but the low growth trend observed in recent decades persists and effective actions and policies will be required to reverse it.


With regard to the global supply chain and the logistics sector, the pandemic has generally had a negative impact, generating a slowdown in the global transport of goods. Rising input and financing costs, along with changes in consumer behavior and trade patterns, have affected supply chains around the world. Inflation has also had a significant impact, affecting demand and requiring adjustments in production, inventory management and distribution strategies. In addition, the downturn in ocean freight volumes has trickled down to negatively affect the trucking and rail sectors. Economic uncertainty has led to a reduction in inventory levels and a delay in restocking by Western importers. Overall, there is a drop in container shipping prices and a persistent lack of revival in demand. To drive sustainable growth in this sector, investments in infrastructure and new industrial policies that reduce dependence on certain regions and resources will be required.


SOURCES:

1) Shine, I. (2023, mayo 12). Chief economists on what lies ahead for the world in 2023. World Economic Forum. https://www.weforum.org/agenda/2023/05/global-economy-2023-chief-economists-report/

2) Del Río, J. (2023), ¿Desaceleración con crecimiento moderado o una recesión para la economía mundial en 2023?, Nota estratégica No. 183, Instituto Belisario Domínguez, Senado de la República.

3) Brusuelas, J. (2023, junio 21). Midyear global outlook: Slowdown followed by recovery as India leads the way. The Real Economy Blog. https://realeconomy.rsmus.com/midyear-global-outlook-slowdown-followed-by-recovery-as-india-leads-the-way/?dysig_tid=e6c890025da54e5e9555d71a97302653&utm_leadsource=rsmpower&utm_social=LinkedIn&utm_post=d5affa57-e043-4711-86a6-0e11e104b0e5&utm_channel_id=8786&utm_U.S.er=11826&cmpid=allsocial:0521-rsm-power:bb01

4) Economista, E. (2023, junio 7). La OCDE eleva a al 2.7% su previsión de crecimiento mundial para este año. El Economista. https://www.eleconomista.com.mx/economia/La-OCDE-eleva-a-al-2.7-su-prevision-de-crecimiento-mundial-para-este-ano-20230607-0036.html

5) Brusuelas, J. (2023, junio 21). Midyear global outlook: Slowdown followed by recovery as India leads the way. The Real Economy Blog. https://realeconomy.rsmus.com/midyear-global-outlook-slowdown-followed-by-recovery-as-india-leads-the-way/?dysig_tid=e6c890025da54e5e9555d71a97302653&utm_leadsource=rsmpower&utm_social=LinkedIn&utm_post=d5affa57-e043-4711-86a6-0e11e104b0e5&utm_channel_id=8786&utm_U.S.er=11826&cmpid=allsocial:0521-rsm-power:bb01

6) Brusuelas, J. (2023, junio 21). Midyear global outlook: Slowdown followed by recovery as India leads the way. The Real Economy Blog. https://realeconomy.rsmus.com/midyear-global-outlook-slowdown-followed-by-recovery-as-india-leads-the-way/?dysig_tid=e6c890025da54e5e9555d71a97302653&utm_leadsource=rsmpower&utm_social=LinkedIn&utm_post=d5affa57-e043-4711-86a6-0e11e104b0e5&utm_channel_id=8786&utm_U.S.er=11826&cmpid=allsocial:0521-rsm-power:bb01

7) World Bank Group. Global Economic Prospects, June 2023. Pp. 74

8) Brusuelas, J. (2023, junio 21). Midyear global outlook: Slowdown followed by recovery as India leads the way. The Real Economy Blog. https://realeconomy.rsmus.com/midyear-global-outlook-slowdown-followed-by-recovery-as-india-leads-the-way/?dysig_tid=e6c890025da54e5e9555d71a97302653&utm_leadsource=rsmpower&utm_social=LinkedIn&utm_post=d5affa57-e043-4711-86a6-0e11e104b0e5&utm_channel_id=8786&utm_U.S.er=11826&cmpid=allsocial:0521-rsm-power:bb01

9) Brusuelas, J. (2023, junio 21). Midyear global outlook: Slowdown followed by recovery as India leads the way. The Real Economy Blog. https://realeconomy.rsmus.com/midyear-global-outlook-slowdown-followed-by-recovery-as-india-leads-the-way/?dysig_tid=e6c890025da54e5e9555d71a97302653&utm_leadsource=rsmpower&utm_social=LinkedIn&utm_post=d5affa57-e043-4711-86a6-0e11e104b0e5&utm_channel_id=8786&utm_U.S.er=11826&cmpid=allsocial:0521-rsm-power:bb01

10) Brusuelas, J. (2023, junio 21). Midyear global outlook: Slowdown followed by recovery as India leads the way. The Real Economy Blog. https://realeconomy.rsmus.com/midyear-global-outlook-slowdown-followed-by-recovery-as-india-leads-the-way/?dysig_tid=e6c890025da54e5e9555d71a97302653&utm_leadsource=rsmpower&utm_social=LinkedIn&utm_post=d5affa57-e043-4711-86a6-0e11e104b0e5&utm_channel_id=8786&utm_U.S.er=11826&cmpid=allsocial:0521-rsm-power:bb01

11) Persistente caída en precios de contenedores y resurgimiento de interrupciones en la cadena de suministro. (2023, junio 12). MasContainer. https://www.mascontainer.com/persistente-caida-en-precios-de-contenedores-y-resurgimiento-de-interrupciones-en-la-cadena-de-suministro/

12) Chausovsky, A. (2022, octubre 17). ‘freight recession’?: What to know about logistics in 2023 and beyond (the discerning distributor, episode 3). Distribution Strategy Group. https://distributionstrategy.com/freight-recession-what-to-know-about-logistics-in-2023-and-beyond-the-discerning-distributor-episode-3/

13) Chausovsky, A. (2022, octubre 17). ‘freight recession’?: What to know about logistics in 2023 and beyond (the discerning distributor, episode 3). Distribution Strategy Group. https://distributionstrategy.com/freight-recession-what-to-know-about-logistics-in-2023-and-beyond-the-discerning-distributor-episode-3/





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