Slow and steady growth may win in the end for apparel in 2023. It's not as sexy, but it's real and that's something for the industry to consider as it wakes up from its New Year hangover, writes Robert Antoshak, Gherzi Textil Organisation partner.
As we begin another year, it’s hard not to worry about our industry’s prospects and opportunities for growth. For sure, the industry has been knocked around over the past few years and 2022 was no exception.
We’re still recovering from the effects of the pandemic, struggling with uneven demand and crippled supply chains while working to offload enormous inventories. No small task.
If that wasn’t bad enough, there are other things to be concerned about as the new year begins. For instance, China has political and economic problems (some Covid-induced, some not). Supply chains are shifting as nearshoring, and greater sourcing diversification has taken hold. Inflation remains a concern (it’s down, but not done).
There’s more. The war continues to rage in Ukraine, with both sides seemingly locked in for a long slog. A polarised US political system won’t help trade policy, and, of course, sharply higher interest rates and a cloudy economic outlook make the prospects for the industry harder to discern.
From a macroeconomic perspective, supply and demand continued to be out of whack directly affecting the price of raw materials and finished products. Indeed, inflation spiked last year as the economic effects of the war in Ukraine, supply and demand imbalances, increased government spending, higher interest rates, and tight labour markets (particularly in the US) all conspired to muddy economic waters.
With all of this as a backdrop, will consumer demand hold up? What about all of the Covid inventory? Will that be sold off? Many questions, but what about answers?
Yeah, it’s a dreary time. And there are a lot of unknowns. But for our industry, we’re left wondering how we will break out of this economic misery? More pointedly, though, we’re left to contemplate the essential question of our times: when will demand return to predictable levels? After all, we’re still contending with the effects of Covid on consumer purchasing.
For sure, the industry has had its fill of bad news. Moreover, planning and risk management has become more complex over the past few years. Enough already! When will things turn around? Unfortunately, we may have to wait a while longer for an answer.
The sad news keeps coming, folks. International Monetary Fund managing director Kristalina Georgieva recently warned the global economy faces “a tough year, tougher than the year we leave behind,” according to Bloomberg.
“We expect one-third of the world economy to be in recession,” Georgieva said on CBS’s ‘Face the Nation’ in an interview aired 1 January. “Why? Because the three big economies — US, EU, China — are all slowing down simultaneously.” Yeah, Happy New Year.
The gloomy assessment is in line with previous IMF warnings. “The IMF already warned in October that more than a third of the global economy will contract and that there is a 25% chance of global GDP growing by less than 2% in 2023, which it defines as a global recession,” noted Bloomberg.
Georgieva explained the three largest economies – the US, China, and EU – have mixed prospects ahead. According to the IMF leader, “the US may avoid recession,” while the European Union has been “very severely hit by the war in Ukraine — half of the EU will be in recession next year.” At the same time, she said China faces a “tough year.”
The IMF believes central banks should continue to raise interest rates. Still, the organisation also believes that higher rates risk pushing many economies into recession to lessen demand. In fact, a recession may be necessary to rebuild the global economy over the long run.
However, should developed-world economies tank, for instance, global growth will wither on the vine. The same goes for international trade. But with inflation running hot in the developed world, central banks have little choice but to raise interest rates to dampen economic growth and lessen inflationary pressures. Indeed, some moderation will be necessary to cool inflation. Only how far economies will have to fall remains a guessing game.
For our industry, however, slower economic growth will translate to weaker retail sales and, by extension, diminishing demand for everything from fibres to textiles – the dreaded ripple effect. This brings us back to our earlier question: when will this straighten out? To help answer this, there may be some clues worth exploring.
Although the US toyed with recession early last year, its economy has remained resilient, with annualised GDP growth of 3.2% in the third quarter of 2022. This compares to -0.6% during the second quarter. In turn, the labour market remains tight. As a result, wages are high, but along with that, so is inflation due to consumer demand. However, consumer demand has shifted away from discretionary purchases, like clothing, in favour of services such as restaurants and travel.
It’s funny how for so long, the critical measure of anything economic – at least from an analyst’s point of view – centred on the growth of international trade. It was super important. Today, however, that’s changed. Instead, national or regional gross domestic product (GDP) appears more important as globalised business realigns around regional pockets of production and consumption. International trade doesn’t dominate economies like it once did.
So, why the shift? It’s a case of rediscovering the fundamental underpinning of all economic activity, the GDP. Trade is an outgrowth or extension of GDP, a percentage of economic activity. During the ascendancy of globalisation, global trade garnered all the headlines – and why not? That’s where all the growth was!
But it’s important to remember that there is no trade without GDP. Trade and GDP are like dance partners – with some countries showing moves favouring trade over other forms of economic activity. Others, in turn, prefer domestic production over international trade.
See what I mean. In the case of the United States, according to the World Bank, trade makes up a relatively modest 20% of economic activity. For the world, international trade equates to more than half of the global GDP. But for developing countries, international trade makes up an even more substantial segment of GDP. In China, for example, international trade made up 66% of the country’s GDP as recently as 2006. However, it plummeted to less than half its share in 2020.
Interestingly, 2006 was the high-water mark for trade’s share of global GDP. Since then, trade’s share of global economic activity has fallen. Then, we had the pandemic, temporarily disrupting traditional trade activities. But, even before the pandemic, globalised trade was losing some appeal. But this trend has only been exacerbated by Covid.
For the last 30 years or so, international trade has been king. And investors around the world fed the king. In fact, trade provided the engine of economic development in countries still proving their mettle in the global economy. Such rapid growth also provided investors with fast returns. Money was made.
But, in turn, slow and steady growth may win in the end; it’s not as sexy, but it’s real. And that’s something for the industry to consider as the world wakes up from its New Year hangover. Slow and steady may prove more attractive than flashy and unsustainable. Long money versus short money. Let’s see.
The era of cheap money and low interest rates is over – at least for now. Pointedly, the search for returns has pulled back in favour of a return of certainty. But, unfortunately, the same goes for the supply chain. “Just in time” turned into a train wreck. It worked great until it jumped the tracks – with people becoming more risk-averse.
The global economy has entered a period of extended uncertainty. Change is everywhere, but the effects of change have yet to be fully revealed. We know regionalisation has become more significant. Yet traditional globalised sourcing remains the norm.
So, as we enter 2023, we need
to recognise that the sands are shifting under our feet. What we once thought
was solid has proven to be different. Even so, the uncertainty of today will
give way to more certainty as the year unfolds. But we will have to be patient.
And take the long view.
By Just Style