war in iraq

 

War and terrorism a risk to Globalization

Conference Board analysis predicts supply chain problems

March 07, 2003

The dual threats of terrorism and war may be able to achieve what anti-globalization forces have not -- a significant decline in global trade and investment, according to an analysis released today by The Conference Board.

"The most serious economic consequence of the current global security threat is the vulnerability of the United States and other countries that depend on global trade to shocks from actual supply interruptions and to the sharply changed incentives that have promoted globalization," says Gail D. Fosler, Senior Vice President and Chief Economist of The Conference Board, in the current issue of StraightTalk, her monthly newsletter.

This new, higher risk to the global business environment has important implications for global market and supply chain strategies.

In the U.S., several important industries have increasingly come to depend on their global supply chain both for supplying the U.S. market and for export. Retailers and domestically branded apparel, appliance, and footwear manufacturers and distributors have tapped low-cost labor elsewhere, often Asia. Computers, electronics, and video, audio and communications equipment depend heavily on offshore supply. More than 40% of all U.S. requirements for both consumer and industrial use in footwear, apparel, and computers are made overseas.

Uncertain supply chain connections

This increasing global dependence also exposes both companies and countries to the risks of supply interruption from real or perceived terrorist threats. The impact of supply shocks differs depending on the industry. Shocks to the auto industry have a big impact on the industrial sector, because they account for large up-stream purchases. Service sector shocks, in contrast, have relatively less impact on the rest of the economy.

Large differences in the economic impacts among industries help explain the devastation caused by the drop in technology demand and the impact of the West Coast dock strike on the one hand and the relatively smaller economic effects of 9/11 on the other. Not only did the technology industry itself decline, but it also dragged with it close to twice as much demand throughout the economy. The dock strike had a similar impact.

The hotel and air transportation industries shutdown in the wake of 9/11 did not ripple through the economy to the same extent, although the impact was enormous on the companies and industries involved. While these industries incurred huge economic hardship from which they have yet to recover, they do not have the broad economic reach in either scope or demand that some other industries do.

Global growth will continue

Despite the threat of war and the darkening mood in financial markets, the global economy is intact. Overall, global growth is projected to be about 3.4% this year, with better economic performance in almost all regions.

"Since stock markets are forward-looking animals, it is not surprising that they have continued to take valuations down in the face of the tremendous uncertainty surrounding events in the Middle East and increasing unease about the deteriorating situation in North Korea," says Fosler. "Still, corporate profits in most major countries are showing substantial improvement even in the current lackluster growth environment. This profit improvement is not unencumbered by financial risks as weak stock markets, bad credits, and other impairments tug at the bottom line. But, in spite of this, a recovery is clearly underway."

Even in Europe where the financial mood is blackest, the strengthening U.S. dynamic and the strong correlation between the European and U.S. business cycles suggest that the European economy will improve later in 2003. Just as Europe was not immune from the U.S. slowdown in 2000 and 2001, it will also be lifted by faster growth in the U.S. this year.

U.S. consumer fundamentals also appear to be improving. The continued rise in wages and salaries, which is a core component of consumers' spending power even in the face of a sharp drop in consumer confidence, complements a huge gain in real disposable income driven by low inflation and the 2001 tax cuts. Consumer spending power is rising at a 5.8% annual rate. Consumer spending growth, which is running at a 3% annual rate, is low, not high, relative to spending power in the face of substantial discounts and financing incentives, reflecting an ongoing trend toward higher savings rates.

But as the February numbers show, consumer confidence is still a problem, and probably constitutes the biggest risk associated with the imminent prospect of war. Until the economic momentum and corresponding job gains really take hold, consumer expectations remain volatile.

"The positive effects for an improving economy are in a foot race with the negative concerns of war," says Fosler. "The outcome is a genuine unknown."

Source:he Conference Board

 

war in iraq