The supply chains that have rocked the global economy during the pandemic are triggering another shock as efforts to stifle trade with Russia strain resources ranging from fertilizers needed for crops and palladium for car manufacturing, to oil which is used to produce almost everything.
The result: a global economy once again facing the prospect of stagflationary forces as inflation rises and growth wanes, forcing central banks to choose which to tackle while fearing that the challenge they do not fall out of control.
The choice is even more difficult now than it was at the start of the pandemic. At the time, monetary policy makers chose to support demand in the event of a recession. Today, inflation is at multi-decade highs, forcing them to focus on soaring prices, even though they may be aware of the risk they might have to move higher. slower than expected.
“If this 2022 supply shock were a first, central banks would be more confident about its transitory impact on inflation,” said Alan Ruskin, chief international strategist at Deutsche Bank. “But this is an inflationary shock that compounds pre-existing evidence of persistent inflation, adding to concerns that policy will have to treat rising prices as more of a phenomenon than a temporary phenomenon, even if the growth slows.”
Already, signs are mounting that supply lines are fraying again as the sanctions-imposed economic blockade increases President Vladimir Putin’s dependence on domestic production and prevents Russian companies from reaching markets and investors abroad.
Almost all of the 10 largest container shipping companies – responsible for transporting around 80% of world trade – have stopped accepting Russian cargo bookings, and ports from Europe to the United States are refusing ships from the country. Some companies choose to punish themselves by refusing to buy Russian raw materials, even if it remains legal.
The fallout extends far beyond Russia and Ukraine, with Copenhagen-based AP Moller-Maersk, the world’s second largest container carrier, warning customers “this is a global impact, and not just limited to trade with Russia”. Maersk on Friday suspended new intercontinental rail reservations, both east and west, between Asia and Europe.
For automakers, the reliance on Russian supplies runs deep. The country is the third largest supplier of nickel in lithium-ion batteries and supplies 40% of palladium for catalytic converters, the metal also being affected by widespread flight bans. According to Fitch, about 90% of US supplies of semiconductor-grade neon come from Ukraine.
Japan’s biggest automakers have joined the growing global retreat of Russian firms, following Ford. Others closer to the war, such as BMW and Volkswagen in Germany, warn of production stoppages. Shares of Renault SA, the European automaker with the most exposure to Russia, have fallen nearly 25% since the start of the invasion.
In the United States, Boeing is at an impasse after the United States banned flights from a Russian company it relies on, which means it cannot transport certain structures from other places to its main jumbo plant in Everett, Washington.
Titanium is the other vital input for the aerospace industry, with companies stockpiling the key material and seeking to diversify outside of Russia. Engine maker Safran gets almost half of its titanium from Russia’s VSMPO-Avisma Corp., while Rolls-Royce Holdings said 20% of its titanium comes from the country.
The isolation of a power plant also drives up fuel and food prices. Oil, of which Russia produces more than 10% of global output, is now above $110 a barrel, while European natural gas hit a record high last week. Wheat climbed past $11 a bushel to its highest level in 14 years.
Even prices for urea, a widely used nitrogen fertilizer, have surged over the past week, prompting howls of protest from farmers as far afield as Iowa and Brazil.
For China, trade with Russia poses new risks, costs and potential obstacles. Rail transport from China through Russia is currently in operation, said Mark Ma, owner of Seabay International Freight Forwarding, a company that handles Chinese goods sold on platforms such as Amazon.com.
However, some logistics companies have decided to stop shipping goods as the journey takes time and there are still uncertainties in the process of transit arrangement, customs clearance, cargo security as well as payment collection.
Ma said his company has seen a reduction in available shipping capacity, which could increase demand for land routes.
In total, the growing supply chain crisis could end up being enough to knock $1 trillion off the value of the global economy and add 3% to global inflation this year, according to the National Institute for Economic Research of the United Kingdom.
“The conflict in Ukraine is placing additional economic strain on a COVID-stretched system,” said Jagjit Chadha, director of NIESR. “Supply chains will be even more fractured and monetary and fiscal policies will come under severe scrutiny.”
Of course, Russia still had the most to lose with production expected to be nearly 10% a year lower in the long term than if trade relations had not changed, according to data from the Kiel Institute. for the World Economy and the Austrian Institute for Economic Research.
But around the world, economists are also raising their inflation forecasts and reducing those for growth. JPMorgan Chase economists now forecast global growth of 3.1% on a fourth-to-fourth-quarter basis, down 0.8 percentage points since Feb. 18. And they predict inflation of 4.6% in the last three months of the year, up 0.9 percentage points. .
US Federal Reserve Chairman Jerome Powell on Wednesday signaled a quarter-percentage-point hike in interest rates this month, joining a chorus of central bankers raising rates around the world as they are trying to calm inflation.
As he spoke, Bank of Canada Governor Tiff Macklem was already initiating what could turn out to be a series of rate hikes. Hungary followed the next day.
After rising twice in recent months, Bank of England officials warn that the fallout from the attack on Ukraine could upend the outlook for the UK economy, although they still appear to be on track to act again this month.
Gary Luk, who runs a Hong Kong-based freight forwarding company, said around 20% of his business was affected by the war, as it involved the organization of goods including audio equipment and gadgets electronics, to be transported or shipped from China to Eastern Europe.
Falling currencies mean his clients in Russia and Ukraine face skyrocketing costs to pay for his services in US dollars, so they are delaying payment, Luk said. Late payments are in the six-digit dollar figure, putting increasing pressure on his company’s cash flow, he said.
“Now we dare not accept any new orders from the region,” Luk said. “We have already suffered from increased airline and shipping charges, and war is now adding insult to injury.”