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Global economic slowdown and its impact on Bangladesh RMG sector

The world economy is experiencing a period of dull and low growth so market participants are increasingly worried about the prospect of the year 2019. Most economists agreed that economic growth is slowing but it will not be in the form of recession.

Global economic slowdown impact on BD RMG

But the political move and the trade war among the strongest countries will lead the global economy towards recession if the policymakers cannot work for hand on hand to solve them. Bangladesh textile and apparel sector may see the biggest crisis in the upcoming days and face an unparalleled race to sustain in the global competitive market.

Signaling an economic slowdown or even a recession?

Most of the economists and business elites believe the economic slowdown is not full-blown recession but it can be a recession-forecast. If the economic policymakers fail to have an effective response for the slowdown, definitely, the world will see a recession late this year or early next year.

synchronized global slowdown 2019

World’s renowned economists have been seen the present economic slowdown in a mix reaction. According to Jane Shoemake, Investment Director of global equity income at Janus Henderson Investors – “There is definitely a slowdown in the momentum of the global economy. I don’t think the economy is going to be as strong as it was last year,” she also added, “Our central forecast is not for a recession, it is just for dull, low growth.”

Laurence Boone Chief Economist, OECD said in a press release, “The global economy is facing increasingly serious headwinds.”

He also added “A sharper slowdown in any of the major regions could derail activity worldwide, especially if it spills over to financial markets. ‘’

But Nobel Prize-winning Economist Paul Krugman sees the downturn can be a forecast of a recession. He says ‘’There is a significant chance the world economy is headed for a recession in 2019.’’ In response to a question, he said, “I think that there is quite a good chance that we will have a recession late this year (or) next year.”

The reasons for Global economic slowdown

  1. US.-China trade war: According to new research from the Economist Intelligence Unit the US-China trade war poses the biggest current threat to the global economy. Because China is the world’s second-largest economy and so the impact can spread all over the world. Laurence Boone chief economist, OECD said, “A sharper slowdown in any of the major regions could derail activity worldwide, especially if it spills over to financial markets. ‘’

US is imposing 25% tariff on $200 billion imports from China, while China is imposing trade measures on $100 billion imports from the US.

  1. Brexit’s uncertainty of the final outcome: The Brexit crisis is dragging major impact in the UK economy especially on investment and other important areas of the economy. The economy had lost about 2% of GDP, investment in Britain had been stuck around zero, with a drop of 3.7% in 2018. Andrew Sentence, a former member of the interest rate-setting monetary policy committee (MPC) at the Bank of England, said, “We need an end to Brexit uncertainty, which has been holding back the UK economy for the past three years.”
  2. Economic downturn in the Eurozone: In the present economic slowdown eurozone is the affected severely in Germany and Italy. European Commission said eurozone growth will slow to 1.3% this year from 1.9% in 2018 and is expected to rebound in 2020 to 1.6%.

Germany is the largest economy in the eurozone that any deceleration will be likely bad news for the rest of the 19-members of the bloc and this may cause concern with uncertainties over the global trade. The German statistical office said that the country grew at a rate of 1.5% in 2018, compared to 2.2% in the previous year. Industrial production also declined by 0.4% month-on-month in December.

Italy is another largest economy in the Eurozone has officially fallen back into economic recession for the third time in a decade. The data published by the Italian National Institute of Statistics (ISTAT) showed the economy of Italy slid into recession in the last half of 2018, declining by 0.2% of its GDP in the Q4 and Q3 already displayed a decline of 0.1%. According to common definition two quarters in a row of a declining economy is considered a recession.

How Bangladesh RMG sector will be affected

Apparently, Bangladesh RMG sector is observing prospective growth as per present export data provided by the Export Promotion Bureau (EPB) and no impact was seen because of a global economic slowdown. The growth of export in the apparel sector found satisfactory and it shows positive for the year 2019. But the observation of market insiders for Bangladesh’s apparel export may indicate future threat because of the slowdown of the world economy.

FY 18-19 BD export earning
Figure: Bangladesh’s export earnings witnessed encouraging growth in July-January in the financial year 2018-19. Source NEWAGE Feb 08, 2019
  1. Bangladesh apparel destination to US market: From the major destination of Bangladesh apparel export the USA is not that much affected by the current economic slowdown so it can be seen as the secured and perspective for the apparel industry. As the USA is the largest export destination for Bangladesh garment export that marked a positive growth $3.61 billion with 17.22% in the July-January period of the fiscal year 2018-19.

Industry insiders identified the positive growth due to the ongoing trade tension between the US and China encouraged garment retailers to increase their import orders from Bangladesh for the USA and other destination.

Commerce Minister Tipu Munshi said in a Seminar, “Being a garment businessman, I have realized that despite having trade barriers, the trade conflicts between the United States and China will benefit Bangladesh apparel production and exports.”

On the other hand, new industrial policy by China had pushed towards high-end garments and machinery due to an increase in production and labor cost. Bangladesh apparel producers took the effort to grab the business that China is declining from garment manufacturing. So 2019 can be good and positive in the US market for the Bangladesh exporters.

ADB Country Director Manmohan Parkash said, “The emerging trade relations could offer an opportunity for Bangladesh to increase its export and capture greater space in the global value chain.”

  1. Bangladesh apparel destination to the Eurozone: Germany is the second highest Export earnings destination for Bangladesh, in July-January of the fiscal year 2018-19 export increased by 8.95%, around $3.72 billion from $3.41 billion in the same period of the fiscal year 2017-18.

Overall export growth seems satisfactory for Bangladesh but the uncertainty and a slowing economy in Germany and Italy push the retailers to be more rigid and to move forward carefully. This may halt the future export growth of the Bangladesh garment industry.

Brexit’s uncertainty also put the economy unsteady both for the Eurozone and the UK that may hamper garment export in the coming fiscal year. If the forecast of noble Prize-winning economist Paul Krugman ‘recession late this year (or) next year’ come true, then it is nightmare news really waiting for Bangladesh’s RMG sector. Because the Eurozone is the biggest export market for Bangladesh and they are also the GSP provider as well. Undoubtedly recession in the Eurozone will stop the positive growth in the Bangladesh Apparel sector.

Limiting export destination within the US and EU can be the biggest disaster for the Bangladesh garment industry. Exploring and diversification of new market is now demand of time. In this regard, Chairman of Well Group Syed Nurul Islam said in an interview with Textile Today, “We have to adopt the mindset of global competitiveness. Means not only we must increase our production, quality, and efficiency, but we also have to boost our marketing efficiency. We still are focused solely on the US and EU market. But we don’t see that India, China are potential markets; Malaysia, Thailand, Korea, Japan, and South American countries are also lucrative markets for us. So, we need to expand our existing market into a truly global aspect.”

  1. Price reducing is the biggest problem: Though economy downturn in the global trade does not hamper Bangladesh’s apparel sector in terms of export growth but it reduces the price of garment that becomes the biggest challenge for the garment manufacturer to be competitive. Apparel retailers are constantly pushing to reduce price as the end customer cannot afford to buy more garments because of the overall economic downturn.

Mohammad Hatem Managing Director of MB Knit Fashion expressed to Textile Today ‘’Global buyers and retaliates are not increasing prices of goods rather they cut it.”

Apart from price reduction recent wage hike for the garment worker to 51%, the extra budget cost for more in compliance issue imposed by Accord and Alliance and increase of raw materials cost in the international market that Bangladesh textile and apparel sector mostly dependent, can be an emerging threat for the sector to survive.

“In recent years, production cost in the apparel sector has gone up by manifold caused by the safety improvement expenses. While the new wage implementation expedited the rise of production cost,” said Hatem who is also a leader of the Exporters Association of Bangladesh (EAB).

Furthermore the recent proposal of increasing gas price Tk 18.04 per cubic meter from Tk 7.76 for the industry use which is 132% higher than the previous price, if gets approved by the government, no doubt it will stop RMG growth and ultimately the wheel of Bangladesh economy will stop moving and that will be the biggest crisis.

‘‘If the prices of gas go up once again, it will eat up Bangladesh’s competitiveness in the global market due to the rise in production cost and the competitors will take the opportunity in grabbing the export market share,” said Mohammad Hatem.

  1. Bangladesh’s competitors can be stronger: In the crisis of economic slowdown, retailers are putting pressure to reduce price and so competitors are offering the best price based on raw materials they produce locally in the international trade. This is the best option to move forward in the apparel trade to grab more orders. As cotton is the core raw materials in the apparel manufacturing that can help any cotton producer country to be more competitive and apparel manufacturer country like Bangladesh who is fully dependent on the international market to source its raw materials will be in backtrack position among the competitors. Recent wage hike already thrown Bangladesh from a suitable place to offer the best price and overall higher cost in manufacturing makes the situation tougher and challenging.

In nutshell, the crisis of global downturn economy may not stand to hold Bangladesh’s apparel growth but can be ground to rise others factors and challenges. The future of the global economic slowdown still unknown but Bangladesh apparel sector has to prepare to improve the overall production process and expand the existing market to secure apparel business.

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