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Recalibration of risk factors eased global figures for Q1 this year, but while the growth outlook is brightening, conflict and border restrictions remain a constant threat
After a year of steady increase in global supply chain risk, the CIPS Risk Index, powered by Dun & Bradstreet, shows a decline for the first quarter of 2017. The latest score of 81.9 out of a maximum 100 is still higher than any quarter in 2014 or 2015. And the authors of the report stress that, with a change in calculations for this quarter, risk still lurks below the surface.
“We rebased the export weights for the 132 countries covered from 2010 to 2015,” explains Bodhi Ganguli, lead economist at Dun & Bradstreet. “This is essential to capture the changing dynamics of trade and supply chains, and provides a more accurate assessment of the global economy.” The most recent weighting of individual countries according to export – and therefore their influence on supply chain risk – is anchored to 2015 economic indicators for the first time. The significant change in oil prices since 2010, the previous anchor, is the key driver in this change, reducing the risk factor for a number of regions.
“The growth outlook is brightening, headwinds are diminishing and forecasts generally point to better outcomes than we had expected a year ago,” he says. “Yet underlying this feelgood momentum, the global economy continues to face risks… from the fanning of protectionist inclinations by the rise of right-wing populism, to a one-off hit to supply chains from North Korean aggression.”
Businesses must consider these risks when developing strategies, he says, and use data and insights to take advantage of the rising tide of global growth.
In North America, the new weighting has produced little change – while the oil price drop since 2010 has reduced Canada’s exports, making it less significant (and therefore less risky), America has increased its export of energy. These two factors balance each other out.
Prospects in Canada are positive for employment growth and wage rises. But household debt remains third highest after New Zealand and Australia. Access to the US market and free trade agreements will be a key decider in the future of Canada’s economic wealth.
In Western and Central Europe, the most likely Brexit scenario, according to the report, sees the UK leaving the EU in an orderly fashion with a free trade agreement coming into force in early 2020. Iceland’s risk rating has improved following the formation of a government, as well as Cyprus, with an increase in domestic output and investment growth.
As migrant numbers entering the EU via Italy and Greece have remained low for a few quarters, the report expects temporary border controls to several states will soon be abolished, easing the movement of goods and lowering risk.
The global significance of oil exports coming from Eastern Europe and Central Asia has reduced due to the change in calculations,and has led to a reduction in risk in the region. However, instability remains across the region, and the low oil prices, banking sector stresses, political instabilities and geopolitical tensions all contribute to supply chain risk. In Romania in particular, despite a recovery from protests in February, the government has lost the trust of much of the electorate.
India’s demonetisation last November prompted a slowdown in credit growth and a drop in crop prices, adding to the picture of stalling investment. As activity picked up, ports suffered congestion – planned infrastructure development is needed to ease operations. On the horizon is a goods and service tax, expected to lead to warehouse consolidation and improved operations. But there may be a period of unsettlement from mid-2017.
Social unrest escalated in Bangladesh, with garment sector strikes for better pay leading to cost disruptions, and factory closures to contain the protests.
The changed export value in global trade has cut risk ratings for the remaining three regions. In the Middle East and North Africa, political and economic problems in Jordan and Bahrain have increased risk, while Egypt and Tunisia’s outlook are more settled.
Rebalancing of risk across Latin America, based largely on commodity price drops, has afforded a lower risk rating, supported by good growth prospects in Argentina, and despite conflicts in Chile.
The trend in Sub-Saharan Africa indicates the worst of the commodity bust is over, and all eyes will be on China and its appetite for the region’s exports.
More details: www.cips.org/risk-index
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How does the index work?
It attributes a value to the pressures acting on supply chains by region.
Sourcing professionals can use the CIPS Risk Index, powered by Dun & Bradstreet, to understand their supply chains’ exposure. It provides a quarterly analysis of the socio-economic, physical trade and business continuity factors contributing to supply chain risk across the world. And each region is given a global indication of risk, where 0 is low risk, and 100 is high.
The scores are delivered across each region, weighted according to the contribution to global exports of 132 individual countries. In the first time since its launch in 2014, the country weightings have been amended – from 2010 export contributions to 2015 contributions.