The U.S.-China trade war. Brexit. The decline of the European manufacturing sector. In 2019, the global economy saw a notable amount of turmoil stemming from the political arena. Almost no market or sector has been immune. The result: A dreary year for the global economy, with global economic growth slowing to 2.5%, trade expansion coming to a standstill and businesses everywhere halting investments due to mounting uncertainty.
While 2020 is expected to bring more of the same – slow growth, political upheaval – the good news is that a recession is still not likely, and if one does occur, it will be mild. That said, trade growth is expected to see only a modest rebound in 2020, with growth reaching 1.5%. Trade policy uncertainty will continue to plague the confidence of business leaders and exert far-reaching effects on supply chains. The biggest risks to business supply chains heading into 2020 include:
1. A trade war expansion
Despite the conclusion of the ‘phase one’ of a trade deal, a quick resolution of the U.S.-China trade war is unlikely, given that the conflict is about bigger issues than trade deficits: China’s influence on the global economy and the theft of technology-related intellectual property.
Although tariffs levied by the two nations apply to just 3% of global trade (representing $550 billion of goods), their influence on value chains and trade flows around the world is far from trivial – the tariffs are causing increased prices for inputs that can’t always be passed along to the consumer or the next step in the supply chain, denting revenues. Businesses are either swallowing the increased prices or scrambling to find new supply chains.
It’s possible the trade war could extend to other countries, which would slow trade even further than predicted in 2020. Tariffs have already been threatened on European cars and car parts. If this comes to pass, EU firms, particularly the German auto sector (already under immense pressure), would suffer severe ramifications.
2. Policy missteps
If any major governments make a policy misstep, the fragile economy could see further unrest. With the Brexit as per January 31, some policy uncertainty has been removed. Despite this, Brexit remains a self-imposed financial hardship, causing businesses high levels of uncertainty and scaring them away from fixed investments. The damage hereof will become clearer during 2020 as a new trade relationship with the EU will be shaped. With the large general election victory of the Conservative Party on December 12, the political cloud of those favoring a no-deal Brexit in the party has diminished. Still, a no-deal Brexit is not completely off the table, and would throw chaos into supply chains across Europe.
3. Increased insolvencies
2019 was the first year in a decade that developed economies experienced an annual increase in corporate insolvencies. The U.S. saw the highest increase of 4.2%, with another 3.9% rise predicted for 2020. Contributing factors include lower business investment and external demand combined with higher import and labor costs, as well as high levels of corporate debt. Sectors seeing the highest insolvency increases include steel, automotive, aircraft, retail and agriculture. When a company becomes insolvent, it causes disruption to the supply chains of their trading partners, especially if their partners were blindsided by their poor financial health.
Opportunities in 2020
Despite the challenges facing businesses in 2020, there are some silver linings, apart from the hope that the “phase one” conclusion of the trade deal between the U.S. and China has created. The U.S.’s recent trade agreements with Canada, Mexico and Japan will undoubtedly create some new business opportunities. Even against the challenges of the trade war, China’s economy continues to steam along, and India’s also growing faster than the average, providing fertile ground for business ventures. Finally, the consumer outlook remains positive for the time being, with household consumption in North America and Europe high due to low unemployment.