Six months on: a review of trade trends

In January 2023, Economist Impact launched the third iteration of the “Trade in Transition” programme, presenting private-sector sentiment on trade captured between October and November 2022. Since then, there have been further developments on both the geopolitical and economic fronts. In this article, we demonstrate how four key trends identified towards the end of last year still hold true.

Inflation remains a persistent threat for business

Executives responding to Economist Impact’s global survey at the end of 2022¹ cited heightened inflation as the top reason for pessimism over the next two years. Nearly six months on, both Economist Intelligence Unit (EIU) and World Bank statistics indicate that they were correct in citing this as the primary reason for pessimism. Since the release of the report, The EIU has revised the global inflation estimate for 2023, from 6.9% to 7%.

The sustained conflict in Ukraine and its knock-on supply-chain disruptions continue to remain the primary drivers for elevated inflation. With a protracted war expected in Ukraine, EIU forecasts that inflation will remain elevated at around 4.5% in 2024 and 3.4% in 2025.² Economic growth will continue sluggish with the World Bank projecting growth to fall to 1.7% in 2023 from 2.9% in 2022.³

Against this backdrop, consumers will continue to tighten their belts, hurting business sales. Executives need to be mindful of the continued gloomy economic outlook when determining their strategy for 2023 and beyond.

Market expansion is still a priority for growth

Businesses are still prioritising market expansion amid persistent economic volatility, cited by nearly 42% of respondents at the end of 2022 as the top demand-side trade resilience strategy. Many large-scale companies have announced their plans to expand operations in 2023. For instance, LG Chem announced in March 2023 a US$7.7bn investment to accelerate the commercialisation of three new growth drivers. Amazon Web Services will be investing approximately US$6bn in Malaysia's cloud expansion.⁴ Tesla has plans to invest US$5bn towards a new assembly plant in Mexico in 2023.

Although expanding into new markets looks challenging in these uncertain times, it could bring greater opportunities, primarily through risk mitigation from diversification, a central supply chain theme in Economist Impact’s Trade in Transition research report.

Diversification for resilience as economic volatility continues

Diversifying the supplier base will remain the primary approach to attain resilience in 2023. In another study conducted by Economist Impact in February and March 2023, many respondents stated that diversifying by geography (50%) and diversifying by number of suppliers (51%) were high priorities.⁵ Companies are continuing to move away from single-sourcing and towards diversifying their supplier bases around the world as a way to build resilience and security into their supply chains.⁶ Toy-maker Mattel Inc. is expanding its operations in Mexico, and Apple Inc. is shifting some of its production of smartphones from China to India.

Companies are maintaining inventory buffers

The Trade in Transition survey found that average inventory buffers increased slightly from the previous year, a strategy that is still being prioritised. In the US, inventories are currently growing at double the rate of sales. Data show that wholesale inventories rose by 12% in the year to February 2023⁷ whilst retail sales increased by only 5.9%.⁸

There will be a significant cost to businesses associated with higher inventories, but in the longer term the enhanced resilience and security of supply will help temper any supply-side shocks arising from global volatility. To mitigate the cost impact of inventories, businesses should look to stockpile a percentage of their forecast sales and use just-in-time supply chains to service the remaining demand, providing greater flexibility in response to real-time consumer demand.

In a world with entrenched inflation, geopolitical risks and economic uncertainty, businesses are still prioritising expansion of their operations and making their business decisions based on geopolitical dynamics (see article on national security and trade here). Specifically, diversification and higher inventories offer more resilience for businesses. As such, insights from Trade in Transition will continue to remain valuable in guiding business strategy and decisions in the coming months.