By all accounts, the global economy is getting back to normal.
A recent S&P report said Q1 growth was almost universally better than anticipated across advanced and developing economies. Now, pandemic-related risks are morphing into rebound- and exit-related challenges. In the U.S., and in some emerging markets, rising inflation suggests a bumpy transition from ultralow interest rates and easy financing conditions to what the credit ratings firm calls a post-Covid-19 “steady state.”
“The macro outlook continues to improve,” Paul Gruenwald, global chief economist for S&P global Ratings, said. “We have raised our global growth forecast by 40 basis points to 5.9 percent in 2021, reflecting stronger performance nearly across the board in the first quarter and the faster reopening.”
But underlying concerns could ratchet up the pressure on fashion and retail businesses.
Apparel and footwear companies should keep an eye on global retail sales to stay ahead of the curve in case they need to tweak inventory and production levels.
In the U.S., consumer confidence in June has hit its highest level since March 2020, when Covid scrambled the business and consumer landscape. The Conference Board’s Consumer Confidence Index stands at 127.3, up from 120.0 in May. And consumers have been out in force shopping for new threads to update their closet. While U.S. retail sales in May rose 17.7 percent, it was apparel stores that got the boost, with volume jumping 188 percent to $8.12 billion from $2.82 billion in April, according to U.S. Census Bureau data. And given the continued pent-up consumer demand, the National Retail Federation forecasts annual retail sales growth of 10.5 percent to 13.5 percent, up from prior estimates of 6.5 percent to 8.2 percent.
While U.S. retail sales are expected to continue their upward trajectory, the same can’t be said for business overseas. Sales across Europe and Asia saw pops as economies opened up and consumers headed to stores. But May’s tally showed that while sales rose, the growth was more tepid than in prior months. This was true in Denmark, Ireland, Latvia, Lithuania, Spain and the U.K. Across parts of Asia, retail sales rose in the single digits in Japan, Hong Kong and South Korea, and while still in positive territory, were still lower than the double-digit percentages notched in April. In both Hong Kong and South Korea, gains in retail sales have been slowing since March, reflecting three straight months of percentage declines.
What’s more, legal experts advise fashion businesses to keep a closer eye on their balance sheets and ensure they have the financial flexibility to move into the next many months, amid mounting concerns that banks could begin to tighten their lending requirements.
Howard Bader, a New York City managing partner at the law firm Scarinci Hollenbeck, said banks are becoming “very cautious, and they’re asking for additional collateral in some situations where’s there’s more uncertainty.”
Bader said he’s been getting calls from fashion designers starting up new businesses. And while it’s good to see an influx of new talent, they might face more difficulties in getting funding because they lack the assets to back potential investments.
“They’re asking for real collateral,” the attorney said of some bankers, whom he declined to name. He thinks it is likely “temporary” because of the pandemic, and hopes that “in a year or two, if not sooner, the banks will start lending again under the old formulas and will be taking less collateral.”
“The biggest concern right now are those companies that have a decent amount of substantial debt on their balance sheets,” Barry Posner, a partner at the law firm Kudman Trachten Aloe Posner, said.
Posner urges companies to refine their forecasts to reflect today’s realities rather than basing them on last year’s projections. For Posner, it’s a matter of making sure companies remain in compliance with covenants in their asset-based loans.
“Banks are starting to get nervous. You don’t want to give banks an excuse to call a default or increase their field audits,” Posner said.