Cotton and Textile Sectors Are Facing Economic Uncertainty
September 22, 2022 Economic uncertainty has a direct influence on the demand for cotton and textiles.
Inflation, which has reached a 40-year high level, is getting due attention by national banks in many countries. On Sept. 21, the United States Federal Reserve increased the interest rate for the third straight time in recent months, signaling the need for a restrictive monetary policy to gain an upper hand on inflation.
Among other factors, the ongoing war in Europe is enabling the inflation. The war is dragging the world into recession and a global food crisis, stated the representative of European Union in a Sept. 22 U.N. Security Council meeting.
How bad is the inflation? Consumers experience the increase in price for common items in their daily lives in multiple ways. I used to pay $1.25 for 5 gallons of Glacier water in a retail outlet in Lubbock. Just recently, the price has shot up to $2.50. Prices of commodity items and groceries have climbed up, affecting consumers’ purchasing power.
The Swiss National Bank has raised the interest rate, ending its years of negative rate regime. The Bank of England has also raised the interest rate, signaling the need to moderate demand.
Price stability is needed to control inflation according to Jerome Powell, Chair of the U.S. Federal Reserve, who stated that restrictive interest rate policy is needed to bring down inflation to the 2% level.
The rise in the interest rate will increase the rate of borrowing by companies, which will affect employment and may subsequently lead to recession. This situation will have a direct effect on the global textile sector, and the results will be witnessed in months to come.
Since textiles fall under the category of non-high priority items, high price for goods will lead consumers to prioritize essentials such as food, energy, and housing. In general, high interest rates will lead to softening demand softening.
Mills in India such as Jayalakshmi Textiles have reduced consumption of cotton by about 30%, signaling demand weakening. Some mills in India are selling yarns at a loss of about 30-40 Rupees/Kg.
“Yarn enquiry is dull even though we are entering into the Diwali festive season in India and Christmas times in the West,” stated Velmurugan Shanmugam, General Manager of Jayalakshmi Textiles. “Our mill has cut down the capacity utilization from 98% to 85% and is exploring other options like weekly closures for a day or two.”
While national banks are focused on bringing down inflation by raising the borrowing cost, uncontrolled inflation and restrictive policies have their effect on increasing unemployment, which may lead to economic slowdown. The United States is expected to have increased unemployment in 2023 at about 4.4%.
Demand will be a great influencer in the coming months for the global textile sector. Mills must anticipate for lesser demand and plan accordingly.
Anticipation is that the U.S. Federal Reserve may raise the interest rate again in November, as controlling prices is its priority. Actions by the Federal Reserve will have ripple effects around the world, affecting all sections of society.
While we hope for a soft landing without recession, raising interest rates will lead to slowdowns affecting the demand of products.
The demand side of the economy needs to be watched carefully. The textile industry will be better served if they plan for careful stocking and manage production without excessive inventory. Careful planning of stocks with help with price gains when the economy rebounds, provided there is no recession in 2023.
Prediction is a game, but careful planning is the best way forward.
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