Global Supply Chains Still in a Pinch, Say IHS Economists

A “synchronized deceleration” in the global economy will have larger implications for the supply chain, said IHS Global Insight.

In today’s “world flash” update, analysts said that all the key economies of the world have slowed down, almost simultaneously.

“With few exceptions, consumer and business pessimism has become more pervasive and more pronounced. Central bank concerns about the economic outlook have also increased considerably—and many are easing policies further,” said IHS analysts.

As reported in SCMR, IHS made significant downward revisions to the outlook in June. This month’s changes are “minor,” said analysts.

The distribution of growth remains largely the same: recession in much of Europe, lackluster growth in the United States and Japan, and slower growth in much of the emerging world, albeit still faster than in the developed world.

“Even the in the Asia Pacific, supply chains – which are closely tied to China – will feel the impact,” said IHS Global Insight Economist Sara Johnson.

Real GDP in China grew only 7.6 percent year-on-year in the second quarter, its slowest pace in three years. While the current slowdown in China is not nearly as severe as in 2008–09, in many ways China is more vulnerable now, said Johnson.

“Credit markets are overstretched, house prices are still unsustainably high, commercial banks are weak, and local government debt is high,” she said. “All this suggests that growth this year and next will only be in the 7.5–8.0 percent range. On the other hand, given the recent aggressive policy response by the central bank and government, the odds of a hard landing are no more than 25 percent.”

The good news for U.S. supply chain managers is that most readings on the American economy are well above recession levels, and there are some bright spots. Construction activity (both residential and private nonresidential) is improving. Consumer purchasing power is helped by lower gasoline prices.

“But there is no question that output and employment growth remains extremely modest, and the big June drop in retail sales is worrisome,” said analysts.

IHS now expects real GDP of just 1.2 percent (annual rate) in the second-quarter growth, with a slight improvement to 2.0 percent in the second half of this year and 2013.

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