2018 was one of the best years in recent memory for the global electronics industry in general and the distribution sector in particular. While most electronics companies anticipated 2019 to be a challenging “correction” year following the overexuberance, the expectation by many is that 2020 will see a return to growth and some degree of normalcy.
However, there are indications that challenging times may persist well into the new year. Chief among them is a definitive
end to the U.S.-China trade war. A 30,000-foot view of the global economic outlook provides context for what kind of business environment the electronics sector may be facing in 2020.
Recently, both the International Monetary Fund (IMF) and the Organization of Economic Cooperation and Development (OECD) have downgraded global GDP growth due in large part to the impact of the U.S.-China trade war. About 90% of the world’s economies grew more slowly in 2019 than in 2018, according to the IMF. As a result, the organization downgraded projected global GDP growth for 2019 to 3%, which will be the weakest this decade. Europe is particularly vulnerable.
In October, the IMF revised its 2020 global growth rate down to 3.4% from 3.5% due in large part to continuing trade tensions between China and the U.S. Still, growth in 2020 is an improvement on 2019, thanks in large part to economic growth in emerging economies such as Brazil and India.
The OECD is a bit less optimistic. It projects global GDP growth to remain at a decade-low rate of 2.9% for both 2019 and 2020, with only a modest increase in 2021 in global GDP growth to 3.0%. Like the IMF, OECD points to trade tensions but also calls out China’s slowing economy, climate change, and the devolution of the multilateral order that has dominated the global economy since the breakup of the USSR nearly 30 years ago.
These are structural issues that create a new and troubling kind of uncertainty for manufacturers and their supply chain partners and which cannot be rectified by traditional national fiscal and monetary policy. Indeed, monetary policy is reaching a limit as central banks are pushing interest rates down to zero. And in September, the European Central Bank pushed its benchmark interest rate to negative 0.5% in an effort to stimulate economic growth.
In a September survey report, McKinsey & Co reported that 74% of more than 1,300 business respondents from around the world said global economic conditions are worse now than six months ago, which is the highest percentage since McKinsey began asking the question in 2012. A full two-thirds of survey respondents expect conditions to worsen over the next six months, and about half predict the level of trade will decline over the next 12 months.
A POSITIVE TURN
A significant contributor to the pessimistic outlook has been the trade war between the US and China. To date, the U.S. has imposed tariffs on $360 billion of Chinese goods, which is more than 50% of China’s total exports to the U.S.
But there has been some positive news from both the US and China that indicates a resolution to the trade war may be in the works. On December 12, the US announced it had reached an agreement in principle with China on phase one of a deal that would set the stage for negotiations on tariff reductions. Then, on December 23, China responded that as of January 1, it would cut import tariffs for frozen pork, pharmaceuticals and some high-tech components.
The announcement included tariff cuts for 23 other countries including Australia and South Korea. China also announced additional tariffs reductions on some information technology products and services starting in July 2020. As part of the trade deal, the U.S. has canceled planned tariffs on $156 billion of Chinese imports that included consumer electronics, and cut in half the tariff rate on $120 billion of goods on the round of tariffs imposed in September. Importantly, the 25% tariffs imposed by the US would remain on roughly $250 billion in Chinese goods, including electronics.
Continued in 3 pages