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A new financial storyline for apparel industry

Bangladesh apparel business will modestly continue to grow in the coming years despite the aftermath of the Russia-Ukraine war and the potential threat of recession in the west. It is obvious that Russia’s attack on the US-backed Ukraine helped accelerate inflation, clink investments, and push living costs up in the western countries. These consequences foretell a multitude of disturbances for western retail consumers. The years ahead will also experience a shoot up in the prices of inputs materials. Yet, apparel consumption along with their prices would expectantly show an upsurge in the west, maybe a glimpse of aspiration awaits for the manufacturers as well.

The expansionary monetary policy the world witnessed, and its negative impact on consumer goods felt harsh even before the war in commodity prices. It mainly occurred due to three particular reasons:

  1. a) In response to the Covid, governments over the world passed the bills for the recovery packages – minted massive amounts of paper money and approved hefty paychecks to the business and industry.
  2. b) Secondly, due to the fear that arose during the time of covid, people were not allowed to work or produce real outputs.
  3. C) Thirdly, governments themselves borrowed plentiful money to service debts and meet up public expenditures. Undoubtedly, the current war in Europe, adding to the aforesaid reasons, deteriorates the previous wounds further.

Next hurdles for the industry

As the western countries are the main buyers, it requires to take their market situations into consideration first. The western retaliatory sanctions on Russia and their repercussions can cause a ground for the next global recession. The conflict can inflict economic damage on some European countries, industries, and their people’s lives. The western reactions to war would slow their own real economic recovery. As being the third-largest producer of petroleum and a major exporter of natural gas in Europe, sanctions on Russia may eventually create trouble for economic stability in the west as a whole. Energy prices already started to escalate since Europe imports energy 40 percent from Russia. The sanctions on Russia could be counter damaging for the west in the mid and long run, if not in an immediacy.

Figure 1: The cost trends of the freight to USA and Europe.

The global supply chain, the movements of raw materials, in particular, would be interrupted and the transportation cost would be higher due to the long route and fuel price hike. In these markets of fast fashion, hurdles of the supply chain would be felt painful. Moreover, shipping may be disrupted due to the Ukraine war and, Srilankan economic and financial debacle as the international vessels use the route of Colombo port. The global economic uncertainty, low investment, poor growth, and potential threats of the recession are going to be the realities for the next couple of years.

For the manufacturing countries like Bangladesh, the cost of production would be soaring. The amount paid to the workers is being eroded due to the inflationary pressures on necessary items. Though the local inflation may put comparatively less impact on manufacturers, if the crisis of the food supply chain prolongs, workers will also immensely suffer. The price of commodities like wheat, rice, cereals, and the overall cost of living will rocket – may generate workers’ discontent that brings the issue of salary increase to the table. Eventually, working capital to a greater extent will be required to run the manufacturing units.

Though not significant, BD apparel export was $593 million in FY21 in the Russian market which had already fallen into trouble. Currency devaluation will remain high which pushes the price of raw materials and freight costs to increase worldwide. To export RMG, factories import a lot of inputs in the USD in exchange for BDT, nonetheless, the exporters insist on the devaluation of the already devalued currency.

Despite all the negative outlooks in the west and issues arising at home, apparel export and its’ business will continue to grow more for Bangladesh. To resolve this paradox, it should respond to two key questions: will the export volume increase, and will the product price increase, how?

Product price increase

The long crying phenomenon of low price offering of buyers will be going to change in the near future. Product prices will increase in the consumer market in the west and push up on the buyers’ end as well. Factories will hopefully get better prices for the products they produce for the west. In the US, consumer inflation jumped 8.5 percent officially the sharpest rate of increase since 1982. The EU countries’ consumers are also facing a similar rate of inflation in the essential consumer goods and clothes.

Figure 2: A cycle of rise and fall of the USA and USD based financial economy.

It will be the inevitable case and cause to increase in the product price on the consumer end and on the manufacturer end one after another. The US along with the USD-led economic system is on the verge of consequential decline. If we look at the right second point of figure 2, in this situation a country normally prints and injects huge money into the market and society, pushes usually commodities prices up. In proportion, the financial assets become much larger than that of the real economic and industrial outputs in the USA. (Here, readers are requested to skim the first part of the write-up, published in the previous issue).

Figure 3: The US job market and salary hike.

The US job market exhibits a stunning look right after the covid hit and the salary hike of employees witnesses a financial capacity to upgrade a purchasing power. The graph shows the movement upto 2021, the rise of the salary begins to be rocketing more in 2022 and the employment rate hits a historical positive in this year.

Export volume growth

Though there prevails a number of nuisance in the western consumer markets, the Bangladesh apparel industry will continue to shine more in the near future. The competing countries are in a worse situation – which will create an automatic advantage for Bangladesh. The economic cum political turmoil of Myanmar, Srilanka as well as some eastern European countries, and China’s manifested reluctance of RMG production – will surely favor us to some moderate extent.

Currently, apparel exports to Europe 62 % and the US 18 % of the total export value – will remain the major markets, although a continued uncertainty of European and US retail markets will pose in the next couple of years. The buyers may discover no better alternative than that of Bangladesh. On top of that, the apparel industry of Bangladesh could prove resilience in the RMG supply chain in the near past. Western consumerism and plain requirement of basic items like clothes we make, would not be falling quickly – whatever of their political and financial conditions. Hence there would be no serious impact immediately on Bangladesh.

Figure 4: Estimated apparel export value in 2022.

To pace with the upcoming demand volume, some new investments may be required. Several investments in yarn and fabric manufacturing are in a pipeline by the local and foreign entrepreneurs. It will be a bit challenging investment decision to finance a new expansion. BGMEA usually urges for a currency devaluation against the USD, but it has significant counter plays as well in the case of imports, investment, and inflation. There are reasons for hope as the position of Bangladesh would be calculated as a “proportionate positive” compared to other competing countries in a time ahead of economic and political turbulence.

Part 2 ends.

You Can Read Part 1: https://www.textiletoday.com.bd/is-us-dollar-diminishing-ground-reserve-currency/

The writer is an Innovation Strategist.

If anyone has any feedback or input regarding the published news, please contact: info@textiletoday.com.bd

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