Germany and Australia’s recent experiences with China are a study in contrasts, offering vivid insights into the shifting dynamics of global commerce and their impact on credit risk.

Germany, Europe’s economic powerhouse, is feeling the pinch in its trade relationship with China. In May, German exports to China dropped by a staggering 14%, a decline that points to deeper issues. This fall is tied to escalating trade tensions between the European Union and China. The EU’s hefty tariffs on Chinese electric vehicles—meant to counter what it sees as unfair state subsidies—have sparked a fierce reaction from Beijing. China’s retaliatory measures, such as probing into EU pork products, have only added more fuel to the fire.

These trade tensions are hitting Germany hard, especially in the automotive sector. Production has plummeted by 18%, with industry giants like Volkswagen and BMW caught between falling Chinese demand and fierce competition from local Chinese manufacturers. This is not just a blow to carmakers but a shockwave felt across the entire supply chain, from component suppliers to logistics firms.

Companies deeply tied to the German-Chinese trade network are now at higher risk. The sharp decline in exports reveals vulnerabilities in Germany’s economic structure, particularly for those reliant on the Chinese market. It’s not just the headline figures that are worrying but the broader impact on businesses connected to these exports. Credit must reassess exposure to these firms, bracing for potential defaults or delayed payments as the economic strain begins to bite.

Meanwhile, on the other side of the globe, Australia is basking in a trade boom with China. In 2023, total trade between Australia and China hit a record A$219 billion, a remarkable comeback from the lows during earlier diplomatic disputes and economic sanctions. This resurgence is driven by soaring prices for commodities like iron ore and lithium, vital to China’s industrial and technological sectors.

Australia’s ability to bolster its economic ties with China, while maintaining strong security alliances with the US, showcases its strategic diplomacy and economic savvy. Despite ongoing security concerns and geopolitical complexities, Australia’s trade relationship with China has not only stabilised but flourished. High-level diplomatic engagements and strategic visits have strengthened this interdependence, boosting Australian exporters and reinforcing the country’s economic resilience.

As the global economic environment continues to evolve, the stories of Germany and Australia serve as a guide for managing risks and seizing opportunities in a rapidly changing world.

The latest data from S&P Global paints a worrying picture for the Eurozone, with France’s business activity taking a nosedive. The culprit? Political chaos. French companies are getting jittery as the country gears up for snap parliamentary elections. President Emmanuel Macron called for these elections after a big defeat to Marine Le Pen’s Rassemblement National in the EU elections, leaving businesses in a state of limbo.

In June, France’s Purchasing Managers’ Index (PMI) fell to 48.2 from 48.9. This deeper dive into contraction territory means more companies are seeing a drop in new orders than those experiencing growth. For credit professionals, this isn’t just a statistic—it’s an alarm. Political uncertainty is causing companies to delay or cut back on orders, which could disrupt cash flows and payment schedules, increasing the risk of defaults.

The political turbulence in France is spilling over into the broader Eurozone economy. The composite PMI for the Eurozone, which tracks business activity in both manufacturing and services, slid to a three-month low of 50.8 from 52.2. This decline suggests that the region’s economic recovery is losing steam, driven by both domestic political jitters and weakening foreign demand.

Political uncertainty affects business confidence and operational decisions. As companies become more cautious, they may reduce inventory levels, delay capital expenditures, and tighten their credit terms with suppliers. This conservative approach can create a ripple effect through the supply chain, impacting businesses that depend on timely payments to manage their own financial obligations.

Additionally, the political climate in France could lead to policy shifts that might further impact trade. If Marine Le Pen’s party gains power, we may see policies that disrupt current trade agreements or introduce new tariffs, adding another layer of risk for companies engaged in international trade with France. Alternatively, if the leftwing alliance takes control and implements radical tax-and-spend policies, businesses could face increased operational costs, reducing their profitability and their ability to meet financial commitments.

Inflation and price pressures add another layer of complexity. Easing price increases in the services sector and reduced pricing power among manufacturers suggest softer demand, which can squeeze profit margins. Lower profit margins affect a company’s ability to generate cash flow, increasing the likelihood of delayed payments or defaults. We’ll need a close eye on inflation trends and pricing power to anticipate potential financial stress.

The looming French elections exacerbate the uncertainty. Businesses are adopting a wait-and-see approach, stalling investment and growth decisions, which is reflected in the broader economic slowdown. The next few months will be critical. With the Eurozone’s recovery looking shaky and French elections potentially disrupting the status quo, trade-credit must stay vigilant and ready to adapt to the evolving politics and associated economics.

Ikea is tweaking its global game plan. The Swedish furniture giant is now eyeing a ramp-up in production across the United States and the broader Americas. This shift comes in response to mounting global shipping disruptions and signifies a strategic pivot in an era where seamless trade is increasingly rare.

The move presents a complex mix of risks and opportunities. Boosting local production in the Americas acts as a hedge against these disruptions. By localising production, Ikea reduces its dependency on volatile and increasingly costly global shipping lanes, stabilising its supply chain. This is crucial for mitigating the risk of delayed deliveries and stock shortages, which can strain cash flows and increase the likelihood of defaults among suppliers and distributors.

Companies slow to diversify their supply chains or overly reliant on international shipping are likely to face greater financial instability. Conversely, firms like Ikea, proactively expanding their regional production capabilities, are likely now lower risk due to their enhanced resilience against global disruptions.

Ikea’s push to boost production in the U.S. and the Americas aligns with the broader trend. Businesses are increasingly looking to mitigate risks associated with geopolitical tensions between major economies, such as the ongoing friction between the U.S. and China. These tensions have made historically smooth trade relations fraught with new complexities and costs, prompting many companies to rethink their global supply strategies.

For credit professionals, its time to closely scrutinise Ikea’s supply chain partners in North America and understanding the impact of increased local production on their financial stability. The ability of these partners to ramp up production swiftly and manage the logistical challenges posed by localised manufacturing will be vital in determining their risk profile.

As Ikea enhances its production footprint in the Americas, we’ll need to monitor how these changes affect the company’s supply chain dynamics and financial health. This shift not only represents a strategic adaptation to current disruptions but also offers insight into how companies can navigate and thrive in an unpredictable global trade environment.

YouGov, the polling and data analytics company, has recently sent shockwaves through the markets with a staggering 36% drop in its share price. This dramatic tumble follows a profit warning that spells out serious trouble for the company.

The London-listed firm has drastically cut its profit expectations for the current financial year, now forecasting adjusted operating profits between £41 million and £44 million, down from £48.3 million last year. This cut is driven by slowing sales in its data products division and a noticeable dip in demand for its fast-turnaround research services. This is a red flag for cash flow challenges and payment capacity issues.

Suppliers and partners who depend on YouGov’s timely payments, such as market research firms, data processing services, software providers, and even office supply companies, will be particularly concerned. The revised revenue projections, expected to be between £324 million and £327 million, reflect a slowdown from last year’s £258.3 million. This indicates that YouGov’s ability to generate steady revenue has been compromised, likely leading to tighter liquidity and delayed payments to its supply chain.

The company’s reliance on the electoral cycle and market demand for data products exposes it to cyclical fluctuations, making its revenue streams volatile. Credit managers must account for this cyclicality when assessing associated risk, as businesses with similar dependencies may face the same revenue volatility. Market challenges in Europe, the Middle East, and Africa, cited by YouGov, further complicate the matter. Economic and political instability in these regions can exacerbate revenue swings, demanding close monitoring and adjusted risk assessments.

On one hand, these matters present opportunities to negotiate better credit terms, leverage credit insurance to mitigate risks, and selectively extend credit to more stable segments of YouGov’s business. These measures can help secure transactions and ensure more reliable cash flows. 

However, the threats are significant.

Baker Ing has just dropped a game-changing guide on LinkedIn, now available for free. This invaluable resource is designed to help businesses identify and eliminate bottlenecks in their processes, ensuring smoother operations and better cash flow.

For credit management professionals, this guide is a goldmine. Working capital keeps the lights on, fuels growth, and ensures a company can meet its short-term obligations. However, bottlenecks—those pesky delays and inefficiencies—can choke this vital flow, leading to higher inventory levels, extended payment cycles, and reduced cash flow.

What sets this guide apart is its holistic approach. It’s not just about fixing one problem; it’s about understanding how changes in one area affect the whole business. This ensures that solutions are sustainable and integrated into your overall strategy.

Released at a time when businesses are facing supply chain disruptions and economic uncertainties, this guide couldn’t be more timely. The lessons learned from the Covid-19 pandemic and ongoing geopolitical tensions highlight the need for resilient and flexible management practices.

Don’t miss out. Click here to get your free copy and start optimising your processes today.