Compass Points

Economic Commentary

Turbulent Times: The Global Economy

by Denise Harrison

While many regions throughout the world suffered significant economic setbacks, many sectors in the US have not yet felt the sting of an economic slowdown. The last issue of Compass Points discussed specific sectors, such as aerospace, oil, and shipping, receiving direct hits from various regional economic crises. Asia, Japan, Russia and Latin America all continue to feel the bruises from their falls, as their respective financial bubbles burst and sent their economies tumbling. What if your industry has not felt the scorching from this international turmoil? Should you be concerned about international fluctuations as you develop your course and direction over your next planning horizon?

Global Demand: Impact on the US
In the United States exports account for approximately 10% of GDP. While this is not an enormous number, it does mean that international setbacks do impact the overall growth of the economy. Impact will vary depending on each region’s respective importance as a buyer of US goods and services. Figure 1 shows U.S. exports by selected international economies depicting relative importance over time.

Figure 1
Figure 1

While specific regional declines will cause disruption in select industries, an overall decline will have a more wide ranging impact on the total economy.

“As the world gets closer together, you can’t ignore what’s happening in Southeast Asia or in Latin America or in Russia.” (Leon Levy, Forbes, 3/8/99)

European Situation
Previously Compass Points looked at Japan, Asia, Latin America and Russia, but what about Europe? With 28% of US exports heading to Europe and 15% of corporate profits coming from Europe, it is important to address the health of this region. The last economic commentary discussed the implementation of the Euro, a common currency among 11 European countries. The move to a common currency should enhance competition and corporate efficiency, thus enabling growth. Europe, however, faces significant exposure to the turbulent conditions in the emerging markets. The EU’s credit exposure to emerging markets is more than five times that of the US and twice that of Japan. (Financial Market Strategies - 3/8/99)

In addition to significant financial risk, many European economies are largely manufacturing-based with a labor cost disadvantage relative to the emerging markets. The European manufacturing sector allows for little flexibility in moving production off-shore. This inflexibility leads to high-cost production lowering the attractiveness of European exports world-wide. This relative labor cost disadvantage coupled with lower demand from Russia causes significant weakness in this sector of the European economy. Many European companies were depending on Russia to provide new markets for growth. However, Russia will require cash for investment rather than spend cash for European imports for a long time to come. With 15% of US corporate profits coming from Europe it is important to analyze how a setback in Europe would impact your market segments. If slowdown in Europe does not directly impact your markets, then think about how it might impact your customer’s customer.

Emerging Markets
The economic turmoil in emerging markets significantly impacts the European manufacturing sector, but what about the manufacturing sector in the US? The US manufacturing sector has been able to remain competitive in three ways:

1. Productivity gains,
2. Off-shore production facilities, and
3. Outsourcing production overseas.

While the US manufacturing sector continues to prosper, the employment
in specific segments has declined significantly over the past year. The overall low unemployment figures mask what is really occurring in specific sectors of the US economy. The chart below depicts employment changes by sector over the past year. The Europeans are not the only ones suffering from a relative labor cost disadvantage.

Figure 2

International Outlook

Asia: most countries have hit bottom, uneven growth is expected, no significant upturn is predicted in the near future.

Japan: in its second year of decline, no turnaround in sight despite efforts by the Japanese government.

Latin America: continued turbulence, Mexico remains strong relative to other Latin American countries.

Russia: no easy solutions here.

How can you utilize this information when you develop or update your company’s strategy?

  1. Understand the impact of regional setback on your market segments.
  2. Look beyond your market segments and analyze the customers of each one of your market segments. How are your customer’s customers impacted by the varying regional growth rates?
  3. Revise your strategy based on discussions with your senior management team.

Remember the direct hits are easy to is the resulting ripples that must be identified so that you are able to focus your resources to optimize your company’s future potential.

“While the overall (US) economy has been doing well, there is a risk associated with what is going on outside our borders,” U.S. Treasury Secretary Robert Rubin..... “That risk is going up.” (USA Today, 3/11/99)

Denise Harrison lives in Wilmington, North Carolina and is a consultant for the Center for Simplified Strategic Planning. She presents the workshop, Simplified Strategic Planning for Small to Mid-Sized Companies. For more information about Denise, check out her bio page.

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