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6 October, 2022updated 07 Oct 2022 07:53

The risks of inflation: The UK’s cautionary tale for global apparel

An economic recession and currency imbalances pose the greatest threats to the global apparel industry. Robert P Antoshak, a partner at Gherzi Textil Organisation, shares what can be learned from the UK's recent mistakes.

By Robert Antoshak

The thing about economics is that markets always look to establish equilibrium, a balance between opposing forces. Most notably, we have supply and demand; supply chains and retail offtake; and production and consumption. Forces versus counterforces – and then we get to the money.

For example, we have rising inflation and efforts to contain that inflation. However, if central banks raise interest rates too fast and the system becomes unstable, markets lose equilibrium, causing a recession. When opposing forces clash, companies caught in the middle must develop a strategy to address risk management. Yet, management of risk necessarily comes with real-world implications.

It is helpful to visualise an economy – whether global or local – as an organism that prospers or suffers based on the fuel of economic growth or reduction. Within those parameters occurs a measure of equilibrium, which is essential for the organism’s health. However, if that equilibrium fails, the organism suffers as the system goes out of whack. It gets sick.

Inflation, the UK and apparel – an economic organism out of whack

Today, if we look at the UK, we have an economic organism out of whack, and nurturing that organism back to health is the crucial question of the day. Political and economic doctors propose different treatments, starting with Prime Minister Liz Truss and the Bank of England. Unfortunately, however, there is a wide disagreement on the best course of action – with an ensuing debate that has devolved into crass politics.

Seemingly, Truss has embarked on an inflation-based path of tax cuts to jump-start economic activity in the UK. In contrast, the Bank of England raised interest rates to control inflation. Both approaches are at odds – a contradiction that has helped to undermine the value of the British pound and furthered a run on the British bond market.

“The central bank was in effect being forced to save Britain’s economy from the actions of its own government,” quipped the Financial Times.

Truss’s plan may further political objectives, but it misses the point of respecting basic economics. Indeed, political echo chambers affect so much of the dialogue in Western countries nowadays, an outgrowth and symptom of cultural and political polarisation.

The US ought to know as its politics floats in the ether.

The UK’s cautionary tale for the effects of inflation

The UK’s situation may be a cautionary tale. Still, it comes at a time of economic disequilibrium: inflation is on the loose and a recession is in the offing. Moreover, the unknowns of a major European war weigh heavily on the world. As the Wall Street Journal suggested, “maybe the UK is the canary in the coal mine, giving advance warning of dangers that other developed markets face”.

Now, the importance of the situation in the UK is to outline the seriousness of inflation and its effect not only on the domestic population, consumer spending and overall business activity but on its impact on currencies. The thought of a run on the British pound is hard to comprehend, yet the situation was exacerbated by government policies. Was it not for the efforts of the Bank of England, who knows how low the pound would have gone?

However, whether the UK’s experience proves to be a cautionary tale or merely an aberration remains to be seen, but there are signs the former may prove to be the case. Plenty of evidence of global currency disruption underscores the issues at hand today.

What is more, these currency disruptions deeply affect apparel-producing countries worldwide. Indeed, the strong US dollar, and efforts by the Federal Reserve to stomp out inflation, have had the unintended (if not unknown) effect of deflating currencies throughout the developing world – and it hasn’t helped currencies in the developed world, either.

Currency imbalances

Besides fears of economic recession, currency imbalances pose the greatest threat to the global apparel industry. Inflation is simultaneously a symptom and a cause of all this trouble. It will take time for things to settle down, but during this troubled period, we will be in for a rough ride as an industry.

International transactions are most often conducted in dollars, particularly regarding energy. However, for manufacturers in developing countries, the movement of raw materials (such as cotton and synthetic fibres) and intermediate products (such as yarns and fabrics) cost more today than a year ago.

Concurrently, high inventories in the developed world will take time for retailers and brands to offload. In the short and medium term, that translates into weaker demand – a recessionary development. So here we are left with an economic balancing act. A strong dollar increases demand for cheaper imported products. At the same time, steep inventories, and efforts by the Federal Reserve to raise interest rates to ease inflation, will combine to dampen demand. As a result, the risk of recession grows ever more likely, and global currencies tumble while the dollar soars as a magnet for safe-haven investors.

A trillion-dollar question

It is a mess – there is no getting around that, or the ensuing chaos. There is no correct answer when considering how intertwined the world is today, a characteristic of globalisation. In the past, interest rate actions could function in a comparative vacuum, on a country-by-country basis.

Not so today. In some ways, we are entering uncharted territory. Has globalisation set up the global economy and (by extension) the apparel industry for an unforeseen fall? That, ladies and gentlemen, is the trillion-dollar question.

So, the apparel industry is now between a rock and a hard place. It is squeezed by higher input and energy costs while contending with a slowing market for its products. The worst of all worlds. However, the UK example illustrates how inflation is insidious, distorts the economy, skews business and pollutes political discourse.

Once inflation becomes entrenched in the economic organism, like an addictive drug, it becomes harder to wean from the body politic. There was a time when things like currency runs and economic imbalances only seemed to afflict the developing world. That is not the case anymore. The developed world is not immune. In fact, the forces that made globalisation so favourable for the industry to expand globally – namely deflationary prices and easy money – may be ending.

Entering a new world

Adam Tooze, the economic historian, recently said in the New York Times: “As far as the advanced economies have been concerned, the era of globalisation since the 1990s has been one of disinflation and monetary expansion by central banks. Now that balance is being reversed, and on a global scale.”

What is more, what previously worked may no longer be relevant. This is particularly the case as the developed world readjusts its priorities to combat inflation and the developing world adapts to a changing economic landscape. Although the seeds of change were planted before the pandemic, change has only accelerated since Covid.

Toss in a war, and the world is on a new trajectory. It is a scary prospect as we don’t know where this will end.

This article originally appeared in Just Style.

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