Squeezed Working Capital is a Bigger Supply Chain Threat Than Waning Demand

By James Stirk, Ceo, Tradeshift

Following the launch of Tradeshift’s Q2 Index of Global Trade Health, Christian Lanng, Co-Founder of Tradeshift, gives his take on what the data is telling us about the outlook for global trade over the coming months and why we’re committed to helping businesses access the working capital they need to navigate a challenging economic environment.

The resilience of the US economy has caught many forecasters by surprise

2023 was supposed to be China’s year. Instead, it may well prove to be the year when the US reasserts its position as the world’s trade juggernaut, leaving the rest of the world for dust.

Our Q2 Index of Global Trade Health shows transaction volumes across supply chains in the world’s largest economy grew at their fastest pace in more than two years. Trade activity grew at 3 points above the baseline in Q2, quite the turnaround from the -6 point growth we saw in the previous two quarters.

New orders appear to be flowing at a more consistent rate following a post-pandemic inventory glut. Suppliers are reaping the benefits of these more consistent ordering patterns. As predicted in our Q1 Index, invoice traffic in the US recovered strongly, rising to 3 points above the expected range.

The resilience of the US economy has caught many forecasters by surprise. Economists at Goldman Sachs now say there’s a 20% chance of a US recession in the next 12 months, down from their earlier projection of 35% shortly following the failure of Silicon Valley Bank in March.

Consumer spending is fueling the recession-defying overall performance across the US. Retail sales remained relatively robust in Q2. By contrast, export-focused sectors including manufacturing are having a harder time.

The big question is, can the US continue down its own path, or will problems elsewhere start to drag trade down to their level?

Globally, our data suggest that while conditions have improved slightly compared to Q1, the balance of risk remains towards the downside. Total transaction volumes were 4 points below the baseline in Q2, and aren’t showing any signs that they are about to break out from this cycle.

A sector-by-sector analysis of our data shows manufacturing and transport logistics following the pattern we’re seeing globally. Both sectors have been through a period of readjustment over the past 6 months, but now appear to be settling at a much lower rate of activity.

Waning demand for manufactured goods has taken the shine off China’s grand reopening. Our data shows activity across Chinese supply chains grew at slightly above the expected range in Q1; not disastrous, but not quite the spectacular return to form that many had hoped for when the Chinese government first announced an end to Covid prevention measures.

Europe’s industrial heartlands are also suffering due to diminishing global demand for manufactured goods. In Germany, business sentiment has weakened significantly since May, according to a report by the IFO.

Invoice volumes on our platform have started to drop as buyers settle into a pattern of lower ordering. For suppliers, a slowdown in orders isn’t the end of the world as long as the pattern is predictable. What really hurts is the restriction in access to financing which typically accompanies a period of uncertainty.

Many traditional financiers are either capping their capabilities or scaling back. In the case of SMEs, we see banks looking to add greater collateral or security for lending, which increases fixed costs. Research by accountancy firm BDO claims that nine in ten mid-sized businesses are halting growth plans due to difficulty accessing capital.

In a fragile economy, keeping liquidity flowing to small businesses is one of the most effective means to stave off a potentially painful recession that could tip many suppliers into bankruptcy.

Large buyers can play their part by ensuring that their systems and processes do not delay supplier payments. Suppliers who find themselves excluded from traditional capital arrangements should also explore the growing range of alternative financing methods emerging to bridge this gap.

Democratizing access to working capital is fundamental to our vision of a trade network that provides economic opportunity for all. We have already shown that embedding financial services into trading relationships can have a transformative impact on the growth prospects of small to medium enterprises.

We now have the opportunity to expand and scale access to financial services available to businesses through our network, injecting much-needed agility into a global trading environment characterized by near-constant change. This is something we’ll be talking to you a lot more about over the coming weeks and months.