The Global Economy – a Blip or the Start of the Next Recession?

(Editor's note:  wrote this over the weekend; matters got worse this morning of course and we may be entering a full-blown crisis. See our article tomorrow for some thoughts on what procurement should be doing).

The dog days of late summer are usually fairly quiet in terms of significant global news and events but this year has been different. The migrant crisis that has come to the fore in Calais, on the Greek islands and the Macedonian borders is not a short term problem – this is going to be one of the biggest issues facing the western European region for years to come.

Then on the economic front, the downturn in China and the decline in that stock market is having serious knock on effects around the world. On Friday, the FTSE 100 London stock market lost almost 3% of its value, as did New York markets. Mining, consumer product firms, banks, property firms... all crashed with the fear that demand for their products will be hit in coming months.

It’s worth noting that the Shanghai Index is falling against a huge rise over the last 12 months, real market “bubble” stuff. It more than doubled between October 14 and June 15, and is still 50% above where it was last autumn. So that drop is not unexpected really.

But more worrying is the economic data sitting behind that. There is a lot of doubt and cynicism around the official statistics produced by the authorities, but the independent evidence suggests a real slowing down in manufacturing production in China.T he private Caixin/Markit manufacturing purchasing managers' index (PMI) dropped to 47.1 from 47.8 in July, suggesting factory activity in China shrank at its fastest pace in more than six years in August. (Like the CIPS / Markit Index, a figure below 50 indicates contraction).

This has led to a decline in demand for raw materials, which is a reason for the weakness in the oil price, although perhaps not the main one. That declining demand has an obvious impact on the mining firms, their demand for staff, machines and so on, which hits their suppliers, and the shockwaves start spreading to to other sectors of the economy as the reduced demand eventually affects a wide range of firms. Some respond by laying off staff or reducing investment, which leads to further drop in demand, and so on.

So are we entering into another downward phase of the economic cycle? At the moment, much of the world appears to be going that way. Japan’s economy contracted by 1.6% in the second quarter, despite “Abenomics” which has injected huge amounts of government money to stimulate demand. As the FT reported:

“The contraction, down from 4.5 per cent growth in the first quarter, came in slightly lower than market expectations of a 1.8 per cent fall but reflected broad-based weakness in demand across the economy, casting doubt on hopes for a recovery later in the year”.

Many of the emerging economies such as Brazil and Russia also have big problems, in part because of reduced Chinese demand, some because of the oil price decline, whilst general economic incompetence and corruption have contributed too. The currencies of some countries are at 20 year lows, whilst inflation rises and economies shrink. And much of Europe continues to grow very slowly, if at all. The main bright spots are the UK and USA currently, but these countries can’t buck the wider trends completely or forever.

Apart from being a depressing topic for a holiday time of year, what does this mean? From a procurement point of view, we need to be thinking about the effect on our organisations, the risks and opportunities that are arriving now and may grow shortly. More on that in part 2 tomorrow.

First Voice

  1. Mike Pringle:

    Read the full article in The Economist as recently as June (econ.st/1MO00xj)

    “The global economy still faces all manner of hazards, from the Greek debt saga to China’s shaky markets. Few economies have ever gone as long as a decade without tipping into recession—America’s started growing in 2009. Sod’s law decrees that, sooner or later, policymakers will face another downturn. The danger is that, having used up their arsenal, governments and central banks will not have the ammunition to fight the next recession. Paradoxically, reducing that risk requires a willingness to keep policy looser for longer today.”

Discuss this:

Your email address will not be published. Required fields are marked *