Beginning with this blog posting, the Supply Chain Matters blog will be providing additional detail and perspective for each of our ten 2020 Predictions for Industry and Global Supply Chains which we unveiled on December 17.
Background and Introduction
On an annual basis, and since our inception in 2008, The Ferrari Consulting and Research Group and our associated Supply Chain Matters blog publishes a series of supply chain management focused annual predictions which are both described, monitored and scored for actual occurrence at the conclusion of the year.
Such predictions are provided to clients, technology providers and blog readers in the spirit of advising senior and line-of-business executives, multi-industry cross-functional supply chain management and supporting information technology teams a sensing of what to expect in the coming year, Our goal is to depict how likely global, regional, economic, business and industry trends will impact and likely influence required supply chain management actions in the coming year.
The context of these predictions include a broad cross-functional umbrella of what is today considered supply chain management, and includes areas of leadership and strategy, product management, strategic sourcing and procurement, supply chain planning and customer fulfillment, manufacturing, logistics, transportation and customer service management.
2020 Prediction One: Indications of a Cautious and Subdued Global Economic Outlook Coupled with Specific Downside Geo-Political and Market Risks, Will Test the Overall Agility and Resiliency of Multi-Industry Customer Demand and Supply Networks.
At the beginning of 2019, we predicted that industry and global supply chains would encounter a lot more uncertainty relative to global trade, currency, geo-political and climate change risks. Most all of these occurred including an escalating trade war involving the globe’s two largest and most influential economies and supply networks.
The year 2020 is sizing up to be just as challenging with indications of more downside geo-political and market risks. Supply chain management teams will need to be further prepared for needs to demonstrate added agility and resiliency across end-to-end customer fulfillment and support supply networks.
Global and Regional Economic Outlooks
The consensus of 2020 economic forecasts that we have reviewed indicate that economic activity and overall momentum remains subdued. Throughout 2019, we highlighted for readers a discernable downturn in global manufacturing and supply chain activity, and by the end of the year, various PMI indices pointed to a state of manufacturing-led recession among developed regions. The catalyst is generally escalating geo-political trade and tariff tensions and what economists point to as unpredictable policymaking resulting in a persistent state of high uncertainty.
The International Monetary Fund (IMF) World Economic Outlook published in October 2019 indicates that the adjusted global growth forecast for 2019 is expected to be 3 percent by year end and characterized as a significant drop from 2017-18 levels in emerging market and developing economies.
Global growth is forecasted to be 3.4 percent in 2020, primarily driven by expected improvements in the growth of certain emerging market economies in Latin America, the Middle East and developing Europe. That stated, the agency points to a projected slowdown involving China and the United States, a likely more subdued pace of global activity with prominent downside risks.
Among advanced economies, the agency forecasts 2020 growth to remain broadly stable at 1 ¾ percent on average, with a modest pickup in the Eurozone offsetting a gradual decline in U.S. GDP growth. Eurozone growth is expected to grow from a meager 1.2 percent in 2019, growing to a 1.4 percent level in 2020. The U.S. economy is forecasted to decline from 2.4 percent in 2019, to 2.1 percent in 2020, primarily driven by declines in overall exports.
China’s growth is expected to be 6.1 percent in 2019, declining to 5.8 percent in 2020. While that latter number may seem by some to be respectable, it presents considerable challenges for China’s leaders, since the bulk of that growth is expected to stem from a consumer goods vs. a manufacturing-led export economy.
The Chief Economist at the Organization for Economic Cooperation and Development (OECD) commented in September 2019 on why growth is taking a dangerous downward turn:
“For over 18 months, since the outbreak of trade hostilities, growth has been weakening, slowly but surely.” Further noted: “The proliferation of tariffs and subsidies and the increasing unpredictability of trade policies have destroyed growth in international trade, triggering a sharp slowdown in industrial output and investments. When companies do not know what tomorrow will bring, they exercise their “wait and see option.””
Stepping back to view the bigger economic picture, economists observe that the United States and Europe are essential in similar economic positions with respective economies showing various increased signs of faltering and a high dependency on low interest rates, tax or stimulus policies to attempt to spur growth. Hence to these notions of significant downside risks.
View From Supply Management Community
Contrary to some global economic forecasts, The Institute for Supply Management (ISM) Semiannual Economic Forecast published in December 2019 provides a consensus view from a reported 58 percent of U.S. based supply management and purchasing professionals that once again and similar to last year, reflects increased optimism entering the new year.
The report points to an expected 4.8 percent manufacturing revenue increase during 2020, somewhat lower than last year’s initial 2019 forecast of 5.7 percent manufacturing revenue growth. The report once again points to continued optimism for growth in the coming year, with revenues expected to increase in all 18 manufacturing industries.
Also similar to last year, the ISM panel anticipates both imports and exports to grow in 2020. This is despite the U.S. ISM Report on Business November 2019 report indicating a PMI value of 48.1, representing the fourth consecutive contraction in PMI activity levels coupled with various leading indicators pointing to continued contraction moving into the new year.
A concerning sign was that manufacturing and supply capital expenditures are forecasted to decrease 2.1 percent over 2019 levels. Last year’s forecast for 2019 capital expenditures called for a 13.4 percent increase in 2019. Overall capacity utilization among U.S. manufacturers was reported as 83.7 percent, which is 1.5 percentage points below last year’s levels in December.
Threat of Recession
Most economists indicate that the risk of economic recession remains elevated for 2020, with recession more likely in the late 2020 or early 2021 time period, depending on whether it is the U.S. or the Eurozone. Both of these economies are already showing signs of manufacturing recession.
A reinforcement of building concerns for economic setback once again came from a Duke University CFO Global Business Outlook Survey released in mid-December 2019. The survey indicated that 56 percent of U.S. CFO’s are preparing for recession with more than half anticipating that recession will occur in the U.S. economy by the end of 2020. Upwards of 80 percent of U.S. CFO’s lean toward recession occurring by the end of 2020. According to this report, finance teams are strengthening relationships with lenders for added liquidity, preserving cash and doubling down on core business initiatives.
European CFO’s likewise have turned less optimistic on future growth related to earnings and employment with concerns related to added cost burdens. Top concerns expressed were similarly economic uncertainty, attracting and retaining qualified employees, weak demand for products/services and employee productivity, among others.
A November 2019 survey conducted by the Association of International Certified Professional Accountants reflected a view from finance executives anticipating lower expectations for revenue and profit growth as well as caution relative to capital spending.
Across the Eurozone, an increasing decline in manufacturing and supply chain activity during 2019, with growing uncertainties related to a potentially messy Brexit, coupled with the continued aggressive stance on tariffs by the United States, will likely have many financial executives on edge.
As we pen these predictions, after the results of a snap general election held across the United Kingdom, the Conservative Party won an overwhelming major of parliamentary seats, assuring that Brexit will occur in early 2020 after several delays in 2019 due to parliamentary gridlock.
The re-constituted United States, Mexico and Canada Trade Agreement (USMCA) faces a more positive outlook for 2020 ratification after a prolonged delay in the U.S. Congress over certain labor and other industry specific tenets.
State of Global Supply Chain Activity Levels
Indices for global-wide manufacturing and supply chain activity in November 2019 further pointed to both subdued activity levels and continued shifting of geographic sourcing to buffer the impacts of ongoing tariffs..
The closely watched J.P. Morgan Global Manufacturing PMI, a broad indicator of global manufacturing and supply chain activity, posted a value of 50.3 for November, after eight consecutive months of being at contraction levels. The report authors pointed to recovery efforts centered on consumer goods sectors while intermediate and capital goods manufacturing growth remained in contraction, the latter being an important indicator of future growth momentum. Business optimism was described as relatively subdued, continuing the 2019 second-half trend of lackluster confidence. The exception is noted as business confidence among certain steadily growing emerging markets regions such as India and Vietnam. One of the most concerning areas in terms of manufacturing and supply chain activity remained the Eurozone, as the average PMI value in Q3 was 46.9, the lowest of all major regions.
As the year 2019 begins its sunset, indications of a somewhat cautious 2020 economic outlook with discernable downside business, industry and geo-political risks likely point to a wait and see perspective among individual businesses along with preparation for a global economic downturn at some point over the next 12-18 months.
The implication is that multi-industry supply chain teams will expected to demonstrate added agility and resiliency in responding to many market unknowns related to growth and profitability.
Industry supply chain management teams will once again be asked to contribute to more meaningful cost reductions and increased productivity while preserving critical capabilities related to retaining talent, meeting digital business transformation needs and investing in the most critical business processes and enabling technologies needed to deliver all of the expected capabilities.
We once again encourage clients and readers to take the time to review what to anticipate in the coming year and how your organization can be best prepared.
As we continue our highlighting of each of our predictions in added detail, please continue to provide your individual feedback along with what specific area that most concerns you in the coming year.
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