The risk of another collapse in asset prices, mounting government debt, the spread of chronic diseases – these were some of the gruesome highlights out of the “Global Risks 2010” report published last week by the World Economic Forum. While the report’s authors stressed the “interconnectedness” of each risk to global stability and the economy, at least two of the six “key risks” on this year’s list should be of particular interest to supply chain executives: an underinvestment in infrastructure, as well as a potential slowdown in Chinese growth. (The complete report can be read here).
The report notes that the poor state of public finances in the wake of the recession are threatening the necessary investments in transport, energy and agricultural infrastructure. While one impact of this underinvestment would be to impede the efficiency of global supply chains, a poignant example of the worst case scenario became evident on the eve of the report’s release with the earthquake in Haiti, where the collapse of already weak transport links has made supplying aid even more difficult.
While the transport constraints in developing economies such as China, India and Brazil are well documented, the threat highlighted by the World Economic Forum is equally relevant to developed economies, where the authors note the fiscal crisis is generally worse, and where continued infrastructure development remains critical.
Daniel M. Hofmann, group chief economist of Zurich Financial Services, one of the contributing companies to the report, cited a study by the American Society of Civil Engineers that gave US critical infrastructure (including transport, power, water and agriculturally-related segments) a grade of “D”, and estimated a need of $2.2 trillion over the next five years to reach an “A” level. That would mean an investment of 3% of GDP per year compared with current levels of 2.2%.
“Infrastructure has always been on the radar [of the risk report] but now with the fiscal crisis so pronounced it will become more of a problem as the gap between the needs and investment made continues to widen,” Hofmann told Automotive Logistics.
The US would be far from the only example of a developed economy suffering from a lack of transport investment. A separate report released this week by the World Bank comparing global logistics performance showed that rail infrastructure, for example, was ranked very poorly among most wealthy countries (read more hereLINK). But the US presents one of the starkest examples of how a lack of public investment could threaten the economy.
In the US most federal transport programmes require state or even local government to match a percentage of the money that comes from Washington for it to qualify for large amounts of the funding. According to Richard Wallace, an expert on transport infrastructure at the Center for Automotive Research, many states, including Michigan at the heart of the automotive sector, will struggle to fully match federal dollars, which will lead to significant shortfalls for needed maintenance, repairs, and upkeep on its transport infrastructure.
“I suspect we will see a strong push from the states to suspend or over-ride the match requirements. Presumably, this trickles down to the local transportation agencies, too,” Wallace told Automotive Logistics.
Wallace said the issue is further compounded by the ongoing delays by the federal government to renew the transportation bill, which would channel around $450m over six years to states to upgrade the transport network. The bill, which would likely require an increase in fuel tax to fund it, has been repeatedly delayed since the previous one expired last year and the Obama administration may not have the stomach to put it to congress until 2011 after the elections at the end of this year.
“The infrastructure investment risk certainly is real, and it threatens to get much worse before it gets better,” said Wallace.
While spending cuts threaten projects in North America and Europe, the needs in developing economies should not be understated either. The World Bank report noted a 45% gap in the performance score between high-income and low-income countries, much of that disparity the result of underdeveloped transport infrastructure. Although stimulus measures in the US, Europe and China have set aside investment for infrastructure, Hofmann indicates that it is not enough to address the long term problems.
“A country like China has so many infrastructure needs that [the stimulus] is just a drop on a hot stove,” he said.
The risk of a Chinese slowdown
China, which many in the automotive and logistics sector have heralded as a beacon of hope during the downturn, also figures as another risk factor in the report that would have harsh consequences for the logistics sector. While China continues to buck the global downturn, the report’s authors remarked that its growth has been unbalanced, with its stimulus package three times larger than that of the US relative to its GDP. This has been partly the story for China’s spectacular rise in car sales last year, stimulated by government incentives and purchasing. The report puts that the chances of China’s GDP growth slowing to below 6% per year as a high risk, with a better-than-20% chance of occurring.
But while such a risk should remain on the radar for global logistics companies, it is also worth noting that a Chinese slowdown has made the ‘key risk’ list in every year that the report was published – since then, the Chinese economy has barely slipped below 9% growth per year.
Such a drop in growth could lead to internal strife in the country as it struggled to keep millions of migrant workers from the poorer hinterlands employed, thus threatening stability as well as consumption. According to Hofmann, the consequences would stretch beyond China’s borders, impacting “trade flows” among China’s rising trade partners in East Asia. This would have particularly painful consequences for global shipping and in major ports such as Hong Kong and Singapore.
