Today’s Global Economic Climate and the State of Apparels

2024 concluded with a global GDP growth rate of 3.3%, representing a modest but steady recovery following widespread disruptions caused by the COVID-19 pandemic. Following two years of monetary policy tightening, central banks worldwide shifted direction and began to ease monetary policy. It was also a significant year for elections, which raised concerns about geopolitical volatility posing challenges for businesses and policymakers.

While China has been a major growth engine in the recent past, Asia's broader economic influence has begun to expand. The BRICS bloc reinforced its growing position as a major economic power, particularly in commodities trading, now accounting for a substantial 37.3% of global GDP based on purchasing power parity, with China and India notably contributing 19.05% and 8.23% respectively, compared to approximately 14.5% each for the US and EU.

Consumer demand has rebounded; however, this resurgence was not uniform across all regions. While markets in the Asia-Pacific, notably China and India, showed growth, the European Union faces economic stagnation and the effects of energy crises. Environmental concerns are also pushing sustainability to the forefront, with regulators and consumers alike increasingly requiring businesses to assume environmental responsibility in their operations and supply chains.

The global apparel industry is a vital contributor to the world economy, projected to be worth approximately USD 1.84 Tn. in 2025. It accounts for 1.63% of global GDP and employs over 430 million. people worldwide. Clothing purchases have increased by 60% in the last two decades, contributing to the constant evolution of the textile and apparel sector.

Regional Dynamics in South Asia

Within the South Asian region, India, Bangladesh, and Sri Lanka are key players in the apparel sector. However, regional dynamics are undergoing changes influenced by recent geopolitical developments and trade policies. The imposition of US tariffs on apparel imports from Bangladesh and Sri Lanka has altered sourcing preferences among global buyers. India, benefiting from comparatively lower tariffs, has become a more attractive sourcing destination for American retailers, which has intensified competition among manufacturers in the region.

Regional logistics are grappling with challenges like port congestions and bottlenecks, especially in major transshipment hubs, causing delays and requiring adjustments in supply chain planning. Additionally, ongoing geopolitical unrest in the Red Sea region threatens global shipping lanes, further straining supply chain stability and netting higher freight costs. This is particularly detrimental for countries like Sri Lanka, where apparel exports represent over half of merchandise exports and nearly half of total export value.

Price volatility in raw materials, stemming from regional supply-demand imbalances, impacts cost structures. Manufacturers are adapting by using flexible procurement strategies and exploring local sourcing. Consumer spending patterns are also changing with a growing middle class and increased demand for quality apparel, creating opportunities in domestic markets alongside serving international clients.

Sri Lanka's Economic Recovery and a Resilient Apparel Sector

In 2024, Sri Lanka's economy demonstrated a remarkable recovery, exceeding growth expectations with a 5% increase driven by strong performances in industry and services, notably construction and tourism-related sectors. Despite this positive growth and fiscal performance, significant challenges persist. While the economy is on a path to recovery, many Sri Lankans continue to face hardship, with household incomes, employment, and overall welfare remaining below pre-crisis levels. The labour market also continues to struggle, contributing to increased emigration as individuals seek opportunities abroad. Sustaining medium-term growth hinges on maintaining macroeconomic stability and implementing reforms that enhance trade, investment, and female labour force participation.

The country’s reliance on traditional markets like the US and EU exposes it to demand fluctuations and tariff changes. Historically, high energy costs have been a burden, and the strengthening of the Sri Lankan Rupee against the U.S. Dollar has made its exports less price-competitive compared to nations with weakening currencies like Bangladesh and Vietnam.

For Sri Lanka, the apparel industry is a cornerstone of the economy and serves as the largest foreign exchange earner. The sector is well-regarded for ethical manufacturing and sustainability, which is a significant draw for global buyers seeking responsible sourcing.

Demonstrating remarkable resilience, Sri Lanka's apparel exports have shown positive growth. In April 2025, exports increased by 15.14% year-on-year, fuelled by higher demand from major markets such as the US, the EU, and the UK, alongside a 21.18% rise in exports to other destinations. For the period from January to April 2025, total apparel exports reached USD 1.66 Bn., marking a 12.4% increase compared to the same period in 2024. These figures highlight the industry's ability to remain competitive in a challenging global environment.

However, the apparel industry in Sri Lanka is navigating multifaceted challenges, including the overarching global economic climate, political factors and internal structural issues. The industry also contends with an ongoing labour shortage due to factors like rural youth migration, international migration, and a cultural aversion to factory work, leading to rising wages and increased turnover, which affects training costs and productivity.

Outlook on a Changing World

The current global economic outlook is overshadowed by intensifying downside risks, largely originating from tariffs imposed on imports by the U.S. Government. Concerns regarding escalating trade tensions and high policy uncertainty threaten to further dampen both short- and long-term growth, while diminished policy buffers threaten to weaken resilience to future volatility. Consequently, global headline inflation is expected to moderate to 4.3% in 2025. In response to these growing challenges and complex trade-offs, central banks will likely prioritise the fine-tuning of monetary policy to achieve price and financial stability.

Growth in the United States is projected to slow to 1.8% due to heightened policy uncertainty, trade tensions, and softer demand. Similarly, emerging market and developing economies are expected to see slower growth, down to 3.7% in 2025, with countries like China, significantly impacted by recent trade measures.

Adding to these pressures, the substantial tariffs placed on apparel imports from over 180 countries are particularly affecting the fashion industry and global supply chains. Key apparel-producing nations such as China (54%), Vietnam (46%), and Bangladesh (37%) face increased costs and greater planning uncertainties as a result of this development.

Sri Lanka's economic growth is projected to moderate to 3.5% in 2025 – a slowdown reflecting lingering effects of the recent financial crisis and ongoing structural barriers to growth, occurring amidst global economic headwinds and significant uncertainty in trade policy. Sustained policy reforms are crucial to maintain macro-fiscal and financial stability, enhance competitiveness, increase productivity, and expand opportunities in the country’s job market.

Efforts are underway to mitigate potential global challenges, and improve market access through Free Trade Agreements and initiatives such as the cumulation of Indonesian fabrics to gain duty-free access to the UK market, aiming for diversification. The Government is promoting textile clusters like the Eravur Industrial Zone to boost local fabric and dye production, shorten lead times, and enhance sustainability. With global buyers increasingly prioritising ethical sourcing, Sri Lanka's strong emphasis on sustainability provides a competitive advantage.