‘A Perfect Storm’: Supply Chain Crisis Could Swerve Global Economy | Supply chain crisis


Everything was going so well. Successful vaccination programs were boosting the post-pandemic recovery of the global economy, stock markets were back to record highs, and prices were rising just enough to make deflation fears a thing of the past.

But a supply crunch that initially put a question mark on the availability of luxury cars or whether there would be enough PlayStations under our Christmas trees instead turns into a full-fledged crisis characterized by a shortage. energy, labor and transport from Liverpool to Los Angeles. , and Qingdao in Queensland.

All of the problems are somehow related to the surge in post-pandemic consumer demand, but taken together they threaten what one prominent economist calls a “stagflationary wind” that could deflect the economy. Mondial economy.

Mohamed El-Erian, adviser to insurance giant Allianz and president of Queens’ College Cambridge, said the surprise drop in factory output in China this week was a clear warning that the global economy could collapse while prices were still rising rapidly, a doomsday double whammy day nearly sank the UK in the 1970s.

“Supply chain problems are much more persistent than most policymakers thought, although companies are less surprised,” he said. “Governments need to rethink quickly because the three things – supply, transport, labor – come together to blow a stagflationary wind in the global economy.”

Energy shortages provide the most striking illustration of the problem, with a growing number of service stations in the UK running out of fuel, and towns in northern China having to ration electricity and force factories in the first manufacturing country in the world to close just as pre-Christmas demand peaks in the west.

Both countries have been caught off guard by lack of reserves amid a worldwide rush for natural gas and oil, the price of which has nearly doubled in 12 months to nearly $ 80 a barrel.

Along with ongoing Covid-related restrictions in some major manufacturing countries such as Vietnam and a well-documented shortage of components such as computer chips, factories are simply not producing enough.

Volkswagen was among the automakers forced to close factories due to a semiconductor shortage. Photograph: Reuters

British auto production fell 27% year-on-year in August due to a shortage of semiconductors and led to a sharp drop in the number of vehicles exported to Australia, the United States and China. On Thursday, the maker of Volkswagen, Ford and Opel Stellantis announced further temporary shutdowns in Germany due to the chip issue. Opel is closing a plant until 2022 – the longest such shutdown to date.

In Japan, an index of finished goods inventories fell to unprecedented levels following the 2011 earthquake and tsunami.

But even if they could get their hands on more sources of energy and materials, and factories could make more goods, it would still cost more to ship things. The Drewry Shipping Index, which measures the cost of containers, is up 291% compared to a year ago. On some busy routes, like from China to Europe’s largest port Rotterdam, the cost of shipping a container has increased six-fold over the past year.

The problems don’t end when goods arrive at a port, with labor shortages presenting a final problem in the increasingly tortuous journey of goods to their final destination. A shortage of truck drivers in many parts of Europe, partly due to disputes over conditions and partly due to ongoing Covid restrictions, is causing delays.

Flavio Romero Macau, a supply chain expert at Edith Cowan University in Western Australia, says pent-up consumer demand in the wake of the pandemic has strained the globally balanced economic ecosystem.

“Consumers are crazy to buy things because the world is teeming with dollars from government stimulus, growing economies and pent-up demand. PlayStations, laptops, phones, gym equipment – you name it, people are trying to buy it, ”he says.

“Higher demand and lower supply equal inflation: there is no way out. You put all of these things together and it’s a perfect storm.

As warnings mount about the threat of stagflation, more economists believe central banks may need to act faster to raise interest rates if inflation sets in in the developed world.

The Bank of England
The Bank of England has signaled that interest rates could rise next year. Photograph: John Sibley / Reuters

The Bank of England has signaled that rates could rise next year, and the US Federal Reserve has finally signaled the end of its massive stimulus package in the event of a pandemic that could push up the cost of borrowing in 2022.

Neil Shearing, chief economist at Capital Economics, said the UK and US were most at risk of overheating inflation, prompting central bank action.

“The risks are generally on the upside and there is a real possibility that inflation will rise at a much higher rate which would ultimately require a more substantial policy tightening,” he said.

A paradigm shift in monetary policy after years of cheap credit could be accompanied by a rebalancing of the global economy as countries seek to shorten supply chains and become more self-sufficient through stronger policies. autarcists, which promote non-dependence on imports. Romero Macao believes many companies could seize the opportunity to move manufacturing from China, where the supply of cheap labor that launched its economic miracle is running out, to countries like Vietnam and the United States. Mexico. The latter, he said, has cheaper labor costs than China, which makes it particularly attractive to US companies.

Richard Flax, chief investment officer of digital wealth manager Moneyfarm, said the crisis is already prompting policymakers and business leaders to rethink.

“Large companies and governments are reviewing their supply chains for essential products, for the sake of security of supply as well as costs. We would expect supply chains in some sectors to become shorter in response to Covid, either through relocation or as companies attempt to diversify their sources of supply. “

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