In this Ferrari Consulting and Research Group Thought Leadership Perspective viewpoint, we highlight added signs of China and global-wide production contraction and the implications of such trending.
Earlier this month, this analyst provided highlights and insights related to July’s reported PMI activity levels on a global and regional basis. Specifically, the PMI results of the two followed indexes related to China especially caught our attention since they both reinforced a concerted shift toward contraction in production and supply chain activity.
July is typically a month in which Chinese suppliers and manufacturers have ramped up production levels to support global-wide back-to-school and other holiday related demand for products that peak in the November and December surge period. In highlighting the July data, we pointed to increasing reports from global business and financial media indicating that the country’s bounce back from the pandemic appears shaky amid the most recent manufacturing and macroeconomic data.
This week’s added reported data from China’s Statistics Bureau on the country’s export and import activity levels should especially capture the attention of industry supply chain management teams.
China Exports and Imports Declining
China’s trade levels reportedly plunged in July and have clouded the economic outlook for the remainder of this year.
The country’s exports in July declined 14.5 percent in dollar terms from year earlier levels, noted as the steepest pace since February 2020, which was at the height of the Covid-19 pandemic. Shipments to the U.S. reportedly declined 23.1 percent in July. The Wall Street Journal indicated that China’s exports to the EU and to the Association of Southeast Asia Nations (ASEAN) each dropped by 21 percent. Bloomberg pointed to exports to markets including Australia, Brazil, Japan, Taiwan and South Korea declining by double-digit percentages as well.
Both Bloomberg and The Wall Street Journal opined that the latest export numbers provide added evidence that the global wide demand for Chinese products is waning. The WSJ specifically noted: “The bad news for many Chinese manufacturers and exporters is that rich countries in the West are reducing their reliance on Chinese goods.”
China’s imports reportedly declined 12.4 percent in July after a 6.8 percent decline in June. The two-month slide was characterized by the WSJ as marking the worst year-over-year decline since January and well below expectations by surveyed economists. The decline reportedly includes intermediate goods and noted by the WSJ: “ ..reflects broader weakness in the entire chain of global manufacturing.”
In its reporting, Bloomberg cited some economists as indicating that the decline in imports was attributed to falling commodity prices, thus, manufacturers were buying products at lower prices. Even if that was true, the declines imply a trending toward declining demand for Chinese manufacturers.
This latest China trade data has provided added warning signs relative to continuing phase of weak economic and trade growth and in the future trending of global supply networks.
The World Bank and the World Trade Organization (WTO) are each forecasting expected global trade volumes of 1.7 percent this year compared to 5.2 percent in 2022. A range of one to two percent of global trade volumes is viewed by economists as reflecting little economic growth. Many eyes will now be focused on forecasts for 2024 and beyond.
The trade data from China coupled with eroding services and real estate economy trending is further raising the concern levels of global economists as to whether the country’s economy is headed towards a hard landing rather than post Covid expansion. China’s influence on global supply networks is significant and thus added contraction levels have cascading implications to other regions.
A further factor are ongoing efforts by manufacturers and retailers in initiating less reliance in termed China Plus materials and production sourcing alternatives. Such actions are likely to potentially further dampen demand levels for Chinese manufacturers in the coming months.
The implication of this added data is reinforcement that businesses and their associated materials sourcing and supply chain strategy teams need to have a keen eye on these macroeconomic forces and economic headwinds that are occurring.
With Chinese manufacturers seeking added work to cover costs, and with a likely falling yuan in global currency markets, there may well be temptations to leverage the current environment with added sourcing of materials within the country. This could especially be the case for small and medium sized businesses. That temptation has to be weighed with the ongoing scenarios as to the longer-term macroeconomic landscape related to regional and domestic markets. The most succinct question is the overall mood of consumers and businesses in their demands for products and components given high levels of inflation, interest rate hikes and geopolitical events.
Our takeaway is that businesses now have to have a regional based supply and demand network perspective. It needs to be supported by likely sources of product demand from a regional or country-specific lens, and supply strategy weighted with resilience, added agility and adaptability capabilities.
Standard forecasting and planning methods are not sufficient in such an environment. Neither are spreadsheets and gut feel. Rather, use of either predictive, prescriptive, what-if scenario based planning, supply network assessment, and sense and respond customer fulfillment execution capabilities are becoming more essential and timelier.
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