Supply Side
World Economy in its Worst Shape for Two Years

The world economy is in its worst shape for two years, with the euro area and emerging markets deteriorating and the danger of deflation rising, according to a Bloomberg Global Poll of international investors. Of those surveyed 38 percent recently described the global economy as worsening, more than double the number who said that in the last poll in July and the most since September 2012, when Europe was stuck in recession. The general gloom was increased by the outlook in China, where factory output rose 7.7 percent from a year earlier. That sounds amazing by European standards, but is the second-weakest pace since 2009, according to government reports.

In Europe, the Commission recently assessed seven countries as being at risk of breaking the stability and growth pact. As the Guardian reported:

Of those, France, Italy and Belgium were the most serious sinners: France because of its persistent inability to get its budget deficit to within 3% of GDP; Italy and Belgium because of soaring public debt levels well beyond the 60% of GDP limit.

All three countries have written to Brussels promising to do more to comply with the rules. Less than a month into the tenure of the five-year commission under Jean-Claude Juncker, Brussels decided to give the three countries the benefit of the doubt.

Unemployment remains scarily high in southern European countries in particular, and of course debt remains a huge issue, but a new fear is deflation. Inflation fell to just 0.4% in October, well below the target of 2%.

Whilst a temporary decline in prices can provide an economic boost (the current oil price fall is good news for Western economies generally), longer-term deflation encourages people to put off spending, and changes future expectations. And just as inflation reduces the real value of government debt, deflation increases it – not great if you are a country sitting on a huge pile of debt. At worst, deflation can lead to years of economic stagnation, as Japan has seen, or at worst, into something as bad as the Great Depression of the 1930s.

The UK appears to be a more positive story. GDP will grow at 3% this year, unemployment is down and the economy has created 500,000 new jobs this year, a truly remarkable figure. As jobs have gone from the state (government) sector, the private sector has more than compensated. But even in the apparently successful UK, not all is positive.

  1. The UK government annual deficit is not coming down as planned and is still running at over 5% of GDP this year – well outside that Commission target, even if the UK is not bound by the Eurozone rules. And total debt at 90% of GDP is also way over the 60% Commission target.
  2. Wages have been rising more slowly than prices – there has been on average a real wage reduction of over 5% in the UK over the last four years.
  3. Net immigration to the UK means that the GDP growth per head is not nearly as impressive as the overall GDP increase – on that basis, it is still lower than pre-crash. And we might argue that measure sums up what the individual feels, rather than the overall GDP figure.

But what is clear is that there is little chance of the government sector across Europe having much additional money to spend in the next few years. That should give procurement people the opportunity to make the case for more effort and investment in procurement, to make sure we get every last cent or penny of value out of the spend in difficult times. The risk is that instead, we will see procurement resource cut, as other areas will be, because of the general lack of money.

So a key focus for procurement needs to be finding ways to provide more efficient and effective procurement services and processes to our public organisations. We need to achieve more benefit without incurring more cost in terms of our procurement activities.

That’s a real challenge – and we will come back to it shortly.