BEERG Newsletter 38 - Reshoring: Bringing it all back home?

According to a report from the European Central Bank more than 40% of multinational firms surveyed plan to move production to politically friendlier countries, with China being the main concern, though other geo-political factors, such as the Russian invasion of Ukraine, were also driving change to sourcing patterns. 

The survey, which included 65 large firms with a global footprint, revealed that 49% of them are looking to "near-shore" or bring production closer to the point of sales, “local production for local sales”. For some companies, this will mean moving production out of Europe into growing markets. Additionally, 42% of the firms expressed interest in "friend-shoring" some operations to less politically volatile locations. The survey highlighted that China was cited as a risk to supply chains by two-thirds of the respondents. 

The move towards friend-shoring is a new phenomenon, with only 11% of firms pursuing this strategy in the past five years. The relocation of production could have a significant impact on employment in the European Union, as more firms are still looking to move production out of the Union than into it. Labour costs, the shortage of workers in general and workers with appropriate skills in particular, were cited as reasons for moving production out of Europe. Furthermore, close to half of the firms expect the changes to result in higher prices, potentially fuelling inflation.

Meanwhile, the International Monetary Fund (IMF) warns that rapid wage increases in central and eastern Europe risk eroding the region’s competitive edge. Incomes have risen at double-digit levels in many countries in the region recent years, but the fund says productivity has largely stalled. 

Alfred Kammer, head of the European department of the IMF, told the Financial Times the trend “could create a competitiveness problem” for a region that has benefited from western European companies relocating production there. Kammer said that while high wage increases had long been the norm in the region, those seen in recent years were “of a different calibre”. “Our warning is don’t get complacent and think this is due to a productivity increase,” he said ahead of the publication of the IMF’s annual report on Europe’s economic outlook. “It isn’t.” 

Wages rose at double-digit annual rates in much of central and eastern Europe in the second quarter — from 16.9% in Hungary to 9.9% in Slovakia, with the region topping the EU tables for pay rises and outstripping the bloc’s 4.5% average. However, inflation in much of the region has also far exceeded the EU average. Wages are expected to grow at a weighted average of 11% for 2023 as a whole, slowing to 7% next year and 6% in 2025, according to the IMF outlook.