Retail Sourcing Report Q2 2020

Retail Sourcing Report Q2 2020

May 22, 2020

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The Retail Sourcing Report provides research and analysis aimed at informing global sourcing and buying decisions for retailers, brands and other sourcing and supply chain professionals. Each issue includes a snapshot of key information and trends impacting global sourcing, such as economic conditions in sourcing countries, container shipping trends, currency exchange and commodity rates. We also cover hot topics ourselves and include insight from analysts and other experts.

Purchasing Manager’s Index (PMI)

To help understand industry and economic conditions in a country, the PMI Index tracks variables such as output, new orders, stock levels, employment and prices across private companies in the manufacturing, construction, retail and service sectors. Over 30 countries and regions participate in various PMI surveys.

A reading below 50 indicates contraction from the previous month, while a reading above 50 indicates growth. This update looks at a selection of emerging economies and key sourcing countries, providing indicators for recent months based on data provided by IHS Markit, NIKKEI, CAIXIN and other sources.

Q2 2020 News & Analysis: PMI indices showed a massive fall in global production activity since the coronavirus outbreak, with Q2 especially affected as production slowed in China and demand in many verticals waned across the rest of the globe. Even as production in China began to pick up in March, lockdowns in many countries through April dampened demand. China and India were some of the only countries to avoid contraction as China rebounded and India only starting to feel the impact. Weak consumer demand should continue to depress manufacturing and purchasing through Q2 and possibly the rest of 2020.

 


Sources: IHS Markit Economics, Nikkei, Caixin

 

Low-Cost Country Sourcing (LCCS) Highlights

This section looks at selected issues impacting sourcing from key LCCS destinations based on data available at the time of printing the report, alongside official import/export numbers highlighting global sourcing trends. With the world under lock-down, low cost-sourcing countries struggled to manage the impact of Covid-19; the broad reality is shut down factories, workers on stand-by, limited raw materials and plummeting demand.

Bangladesh –With relatively few coronavirus cases, but spreading quickly, orders fell off and Bangladesh locked down the country in early April, halting apparel exports and putting millions of workers on standby.

Cambodia – Cambodia’s apparel exports plummeted in the country’s key industry employing over 800,000 workers. Over half of Cambodia’s 500 garment factories are expected to halt production by the end of April.

India – India extended its coronavirus lockdown to May 3 to limit the spread of the virus. While India’s economy has seen minimal impact so far, the World Bank revised its 2020 growth forecast to 1.5-2.8%

Indonesia – Indonesia is expected to reach a peak in their coronavirus cases in May which will extend the economic impact through 2020. For a country which runs a large current account deficit, this is a major crisis.

Pakistan – Officially in lockdown, on April 14, Pakistan announced a plan for gradual reopening of certain industries. Pakistan initially picked up export orders during the China shutdown, but then faced its own crisis.

Philippines – The Philippines acted early to quarantine over half their population of 107 mln, however the counter effect is that the Philippines is expected to post zero GDP growth in 2020 in a best-case scenario.

Thailand – Thailand’s heavy reliance on tourism and exports led to lower GDP growth forecast of 1.5-2.5% for 2020. The Thai government announced stimulus measures in late Q1 valued at over US$ 58 billion.

Turkey – Turkey saw dramatic numbers of new coronavirus cases in April, at more than 4,000 per day. The government implemented a partial lockdown along with stimulus measures to soften the economic impact.

Vietnam – Vietnam had some early success in fighting the pandemic but the spread of the virus led to business shutdowns and slower export demand, with the government lowering GDP growth forecasts to 6%.

 


Sources: News Reports, Various Statistical Bureaus

 

Currency Exchange Rates

Following are exchange rates and indicators for major currencies commonly factored into global sourcing costing estimations. The coronavirus has kept key trading currencies in flux, with the Euro depreciating to 2-year lows in February against both the USD and the Chinese Yuan. The USD depreciated against the Yuan in Q1 before gaining back strength early in Q2, holding strong as a safe-haven currency as stock markets plummeted. The Chinese government has been relatively successful in propping up their currency by investing in foreign exchange reserves. Most countries have also invested heavily in wide range of stimulus measures, including lowering interest rates, but none have the luxury of China’s vast reserves. Analysts expect the USD to hold strong through 2020, while the Euro recovery will depend on European economic recovery. The Chinese Yuan should remain stable due to government intervention.

EUR / USD (April 2019 – April 2020)

The Euro depreciated significantly against the US dollar in Q1 reaching 2-year lows as Europe felt the worst of the pandemic. While analysts are mixed on the direction of EUR/USD exchange, overall forecasts are negative due to weakness in the EU economy.

 

EUR / CNY (April 2019 – April 2020)

After reaching a low against the Chinese Yuan in mid-February, the Euro made back gains late in Q1 and into Q2. China’s economy officially contracted in Q1, for the first time since 1976, with optimistic predictions of 3% GDP growth in 2020. To date, the Yuan has held steady, but is likely to see more flux depending on stimulus measures.

 

USD / CNY (April 2019 – April 2020)

The Chinese Yuan appreciated against the USD through most of Q2 before finally reaching pre-coronavirus levels in early Q2. Analysts predict the USD will continue to hold strong, given the view of the dollar as a haven currency in times of crisis.

 

Focus Topic: The Impact of the Coronavirus

 

Impact on The Global Economy

While the coronavirus has impacted some countries more than others, global supply chains have been disrupted, demand for goods and services has plummeted, tourism and business travel has declined, stock markets and commodity prices plunged, and unemployment hit record levels. JP Morgan estimates that the world economy contracted by 12% from January to March, with equities falling to an equivalent level of the Great Depression and oil prices diving by 60% in Q1.

The difference with past epidemics such as SARS in 2003, or the 2008 Financial Crisis is that now the global economy is much more interconnected, with China playing a significantly larger role in global trade than it did 10 years ago. In 2019, China contributed 17-20% of Global GDP and produces most of the world’s components, intermediate and finished goods. This enlarges the economic fallout for other countries, severely impacting global growth in 2020. With travel restrictions likely to persist, the large spend of Chinese and other tourism will dry up, impacting those countries where tourism is a substantial part of the economy. To survive the pandemic and economic fallout, companies will likely play safe, holding back on investment and hiring, forcing consumers to moderate their spending, further limiting economic growth.

Even prior to the global pandemic, overall economic growth had slowed, with emerging markets and China seeing low single digit growth compared to the robust prior decade. Optimistic current projections are that global growth will slow to between 1.5% – 2.4% in 2020 (from 2.9% in 2019), depending on how fast the virus can be contained, reaching 3.25% in 2021. Most countries are implementing economic stimulus measures, including wage supports, subsidies/loans for businesses and lowering interest rates to record levels. The trade war between the US and China also negatively impacted global trade and investment. While a resolution was in the works prior to the pandemic, it’s unlikely that the US and China will meet trade targets.

Opportunities for mitigating the fallout of the pandemic include the US and China further reducing tariffs, easing of tension between the US and Europe, settling the UK and the EU’s Brexit concerns and greater government intervention to support liquidity and consumer demand. With interest rates down to 10-year lows, the US has unveiled a $2 trillion fiscal expansion package which includes a $500 billion bailout fund to support hard-hit industries. The EU, China and other countries have taken similar steps to prop up their economies, but it’s unlikely to be enough to pull the global economy out of recession quickly. While difficult to predict global growth prospects at this point, projections are tending towards a worst-case scenario, in which containing the virus will extend through Q2, making an economic rebound in 2021 less certain.

Impact on China

While China appears to have had a milder case of the coronavirus (if we believe Beijing’s small numbers), the financial consequences will be harder to avoid. China’s outbreak reached its height during the Chinese New Year in February, which led to an extended shutdown of most of the country. This delayed delivery of orders into Q2. so Instead of accepting delivery or placing new orders, businesses in Europe, North America and elsewhere are stalling or cancelling orders, extending the impact to Q3 and beyond.

In the past 5-10 years, China has relied heavily on domestic consumption and emerging markets to maintain economic growth, but the pandemic is putting a damper on these plans. Even as China gets back to work, factories are operating well below capacity as export demand has dried up and Chinese consumers have tightened spending. With China’s economy contracting in the first quarter for the first time since 1976, the remainder of 2020 is going to be unfamiliar territory for China. Forecasts for China’s GDP growth in 2020 were revised to 4-5% which still seems optimistic until the virus is contained.

According to the Chinese Government, by late March, most of China’s larger factories and around 75% of smaller businesses were up and running, with 90% of workers back to work. However, reports show that logistics bottlenecks and subdued demand are an issue. Trucking capacity remains inadequate as workers face quarantine challenges, resulting in freight and clearance delays on imports and exports. To support the economy, the Chinese State Council has reduced or exempted employer contributions to pension, unemployment and work injury insurance for 3-5 months, saving employers 10-15% in payouts. They also announced infrastructure projects worth over US$7 trillion, beginning in 2020 and are reducing import tariffs and handing out vouchers to encourage domestic consumption.

Impact on Supply Chains

The pandemic has been a true test for global supply chains, with stockpiling and sudden drops in demand making forecasting difficult. Freight transportation, warehousing and fulfillment have all been challenged by labor shortages, lockdowns and variability in demand. For example the US is now faced with a supply glut of oil due to reduced demand, without adequate storage. Shortages of workers is another issue, even for essential logistics services, making it difficult to move container freight and clear customs, creating bottlenecks and increasing logistics costs.

A prolonged delay in getting China’s manufacturing up to speed will add to weakness in the manufacturing sectors of many countries who rely on China for intermediate and finished goods. The impact of suspending production around the globe affects suppliers, downstream partners and logistics businesses. Daegu, a key manufacturing center in South Korea has shut down much of its production, including Samsung Electronics, and LG. Lombardy, the Italian region hit hard by the virus and mostly shut down, is Italy’s industrial center, representing 40% of the country’s GDP.

Impact on Developing Countries

Developing countries are feeling a heavy impact from the Coronavirus, which could worsen as the global economy falters. Initially, some countries benefited from the China shut down by picking up orders, but that changed when the virus hit. Low-cost sourcing locations such as Bangladesh, Cambodia, India, Turkey and Eastern Europe are seeing widespread factory shutdowns, with cancelled orders, limited raw material inputs and large unemployment. Countries in Africa and Asia that rely on oil, commodities and finished good exports will suffer more than developed countries given they are still operating on low minimum wages with few financial reserves, weak healthcare and insufficient funds to prop up their economies.

The reality of global supply chains is that countries are interdependent in their production of goods and with most of the world relying on China in some way, their fates are tied together. For example India, the biggest manufacturer of generic medicines, imports over half its active pharmaceutical ingredients and is heavily dependent on China for raw materials and manufacturing inputs. While the pandemic continues, it will be hard to maintain export numbers which could lead to a global shortage of medicine and other products. While the EU and the US have looked at India as a viable sourcing alternative for textiles, homeware, ceramic goods, furniture and other products, India’s supply chain and regulatory ecosystem does not match China’s.

Some see opportunity in this crisis, to collaborate more closely by reducing trade barriers and tariffs and retooling factories to diversify production, but the reality is that the coronavirus is more like a once in a century event, that only time will repair.

Watch Out for Q3 2020!
The Retail Sourcing Report aims to keep you ahead of the curve by providing facts, insight and analysis on issues impacting retail global sourcing. We produce this free report for individuals at retailers, brands and companies involved in global sourcing and supply chain management. Check back next quarter for the full Q3 2020 update.

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