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Global Supply Chain Pricing May Face New Pressures in 2019

The global economy started 2018 with strong, synchronized growth, but the momentum faded as the year progressed and growth trends diverged. Notably, the economies of the eurozone, the United Kingdom, Japan and China began to weaken. In contrast, the U.S. economy accelerated, thanks to fiscal stimulus.

By ·
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The global economy started 2018 with strong, synchronized growth, but the momentum faded as the year progressed and growth trends diverged. Notably, the economies of the eurozone, the United Kingdom, Japan and China began to weaken. In contrast, the U.S. economy accelerated, thanks to fiscal stimulus.

According to Nariman Behravesh, chief economist at IHS Markit, growth in the U.S. will remain “above trend,” while other key economies will experience further deceleration. As a result, he predicts that global growth will edge down from 3.2% in 2018 to 3.0% in 2019—and will keep eroding over the next few years.

“One major risk in the coming year is the sharp drop-off in world trade growth, which fell from a pace of above 5% at the beginning of 2018 to nearly zero at the end,” says Behravesh. “The risk of an escalation in trade conflicts remains elevated. If such an escalation were to occur, a contraction in world trade could slow the world economy even more. At the same time, the sell-off in equity and commodity markets, on top of the gradual removal of accommodation by some central banks, means that financial conditions worldwide are tightening.”

Combined with heightened political uncertainty in many parts of the world, these risks point to the increased vulnerability of the global economy to further shocks and the greater probability of a recession in the next few years. However, IHS Markit analysts note that chance of recession in 2019 is still relatively low.

Supply chain managers may face mixed blessings on the domestic front, based on estimates about sustainable growth in the labor force and productivity next year. IHS Markit assesses the potential growth in the U.S. economy to be around 2.0%. In 2018, U.S. growth was a well above trend at 2.9%, compared with only 2.2% in 2017.

“The acceleration was almost entirely due to a large dose of fiscal stimulus with tax cuts and spending increases put in place at the beginning of the year,” says Behravesh. “The impact of this stimulus will still be felt in 2019, but with diminishing potency as the year progresses.”

Consequently, IHS Markit expects growth of 2.6% this year, which is less than in 2018, but still above trend. They believe that, by 2020, the effects of stimulus will have fully dissipated, ushering in a new level of maturation. Economists add that over the next year, there are likely to be “countervailing pressures” leading to a plateau.

“On the downside, housing has been a disappointment, the dollar has been rising, credit conditions are tightening, and higher tariffs could still hurt growth,” adds Behravesh. “On the upside, interest rates are still low, and fiscal stimulus is still aiding expansion. For the balance of 2019, U.S. economic fundamentals remain fairly solid.”

Considerably less solid, however, is the energy outlook, says Derik Andreoli, Ph.D.c, director of economic research and forecasting at Mercator International and the “Oil and Fuel” columnist for Logistics Management - SCMR’s sister publication.  “Energy markets have never looked more uncertain,” he says, “and uncertainty is the mother of volatility. Our industry is facing a number of critical unknowns.”

Chief among them, says Andreoli, is on the supply side of the equation. Shippers are eager to learn the extent of threats made by OPEC and Russia (OPEC+) to follow through on recent agreements to cut oil production by 1.2 million barrels per day. “We don’t know yet if shale producers alone will be able to lift production at a rate that’s commensurate with rising global demand,” he adds.

On the oil demand side of the equation, the question remains how long the developing world—which has accumulated massive amounts debt denominated by the U.S. dollar—will respond to rising U.S. interest rates and a potentially steep increase in the value of the dollar.

“As oil is traded in U.S. dollars, rising interest rates will erode the purchasing power of other countries, which should suppress global oil demand growth somewhat, but not enough to ease oil price pressures,” says Andreoli. In short, oil production cuts should push prices up over the first half of 2019. And like last year, this cost should rise from around $50 per barrel in January to around $70 per barrel sometime in the first quarter.

“Over the second quarter, oil prices should continue to rise as domestic shale oil producers struggle to meet the forecasting pressures put on logistics managers charged with balancing all modes,” adds Andreoli. “Demand for all refined products will increase in price, too.”


About the Author

Patrick Burnson, Executive Editor
Patrick Burnson is executive editor for Logistics Management and Supply Chain Management Review magazines and web sites. Patrick is a widely-published writer and editor who has spent most of his career covering international trade, global logistics, and supply chain management. He lives and works in San Francisco, providing readers with a Pacific Rim perspective on industry trends and forecasts. You can reach him directly at [email protected]

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EDITORS' PICKS
Supply Chain Management Issues Confronting Us This Year
A variety of fresh challenges will surface for global traders in January and beyond
Global Supply Chain Pricing May Face New Pressures in 2019
The global economy started 2018 with strong, synchronized growth, but the momentum faded as the year...

IHS Markit’s New Economic “Predictions” for 2019 and Impact on Global Supply Chains
The U.S. will remain “above trend,” while other key economies will experience further...
Global Kuehne + Nagel Indicators Signal Global Supply Chain Resilience
So far this year, international merchandise trade has risen by 10.6%. Emerging markets and North...