Last year, the global economy came to a shaking halt due to the impact of the Covid-19 pandemic. This year, thanks to the global rollout of the Covid-19 vaccine, the world economy is beginning to revive and come back to its prior form slowly. But the pandemic has left a devastating economic issue in its wake, which is the disruption to the global supply chains. Since the virus spread at an unprecedented rate, it forced industries to shut down all across the globe. Since the world essentially came to a halt, there was lower consumer demand and reduced industrial activity. Currently, with lockdowns being lifted from almost all countries, the demand is back, and it is back with a force unreckoned previously. Supply chains that were disrupted previously during the Covid-19 pandemic are still facing huge challenges and are still trying to bounce back.
But this has resulted in chaos between the manufacturers and distributors of goods who cannot produce or supply the same volume as they did during the pre-pandemic era for a lot of reasons; including worker shortages and a lack of key components and raw materials. The supply chain crisis has been observed in different parts of the world for various reasons. For example, the recent power shortages in China due to increased energy prices have affected production recently. In the UK, a shortage of truck drivers has been observed after Brexit. The US has also been going through a shortage of truckers, and Germany has also observed a large backlog at its ports.
Experts have predicted that the situation of the global supply chain will first get worse before it gets better. As the global economy continues to recover, there is a chance it might be impeded by the supply chain disruptions that are now popping up frequently. Additionally, other factors like unavailability of the equal distribution of the Covid-19 vaccine globally, demand for goods, border control and travel restrictions have resulted in the perfect storm where global productions are predicted to be hampered since deliveries are not being made in time. As a result, cost and prices will rise, and the global GDP growth might not be as robust resultantly. Experts have also mentioned that supply might also play catch-up for a while, especially since there have been bottlenecks in every link in the supply chain, but the same has also been observed in containers, shipping, ports, trucks, railroads, air and warehouses.
The bottleneck observed in the supply chain has affected a large number of sectors, services and goods. This has resulted in shortages of electronics and auto, with difficulties in the supply of meat, medicines and household products. As consumer demand for goods that are in short supply continues to rise, freight rates for merchandise coming from China; to the US and Europe have skyrocketed. This has been further exacerbated due to a lack of truck drivers from the US and Europe has increased the problem of delivering the goods to its final destination, which has been one of the reasons for the high prices in stores. The pandemic has only begun highlighting how easily supply chains can be disrupted and how interconnected every sector is.
Supply chain crisis affecting growth
As world economies start getting back to their old rhythm, the global supply chain crisis has now become one of the biggest challenges to overcome for the government. While people are ready to spend for their own choice of products and services, they have been observing that either the products are unavailable or are priced too expensive. This issue has also been worrying people ahead of Christmas and the White House representatives told the media that US citizens might have to pay higher prices and may see sparse shelves this festive season, with the Biden administration trying their best to solve the backlog at the ports.
China and Europe are also experiencing growth problems due to the disruption in the global supply chain. Recently, China reported that its gross domestic product (GDP) grew only 4.9 percent during the third quarter of 2021 as industrial activities rose less than expected in September. Experts have warned that supply chain disruptions are likely to continue since freight rates are still high and chip shortages are still a critical issue for industries like equipment, automobiles and telecommunication devices.
In Vietnam, manufacturing plants that make Nike shoes had to cut down their production since migrant workers had moved back to their homes due to the Covid-19 pandemic. China, which is the world’s manufacturing powerhouse has also observed another episode of the Covid-19 outbreak which has resulted in targeted lockdowns. Reports have indicated that factory prices are rising by 10 percent annually, which is the fastest since 1990.
But, on a brighter note, shipping conditions are expected to get better after the Chinese New Year in early February 2022, but the problems might continue till the middle of next year. So what comes next? The road ahead is an uncharted territory primarily because of the massive bottleneck created all along the way. The logistics system usually rides the ups and downs of the global economy and mostly follows a predictable pattern. Needless to say, that predictable pattern has also been thrown out of balance because of the pandemic. Even with the signs of the supply chain slowing down, the pipeline of international commerce has never been so blocked. And a long-term fix for this means getting the virus completely under control, building suitable infrastructures like ports with better efficiency and faster communication.
Impact on earnings
One of the most serious impacts of the global disruption of the supply chain is the direct effect it has on earnings. Invesco’s chief global market strategist, Kristina Hooper mentioned that the supply chain fears are brewing as a large number of US companies are raising warnings about the increasing costs related to supply chain disruptions and potentially lower earnings. Hooper also mentioned that factors contributing to global supply chain disruptions such as shortage of labor will be resolved in some time, but this could have a long-lasting effect on some other sectors. No matter where the companies are, it’s more than likely that they are also experiencing supply disruptions because of higher input costs and some other problems with finding sufficient labourers.
But some companies will be far more impacted than others. An increase in the overall cost will have a greater impact on the low margin companies usually present in sectors like transportation, general retail, construction and automobile. Companies that are expected to have the least impact are those with wide profit margins, limited raw material costs and small workforces. It includes sectors like tech and healthcare. But even they won’t go unscathed since their stock prices may temporarily suffer as bond yields rise.
Hooper also noted that shortages of some products like semiconductors could return to normal soon with normal levels of production projected to return by the second quarter of 2022. But some other general supply chain disruptions are likely to continue in the shorter term, especially if there are additional waves of Covid-19. Even though on the surface, supply chain disruptions and higher input costs may seem relatively transitory, it is important to keep attention to the present quarter’s earnings.
Inflation has already increased more than monetary policymakers previously anticipated. In the US, inflation stands at a soaring 5.4 percent and it is predicted to stay between the bracket of 4-5 percent till next year if supply constraints don’t ease. But this doesn’t necessarily mean that the world has entered into a re-run of what happened during the 1970s. It took a decade of bad decisions and mistakes to drive the US inflation rate to 10 percent. It is unlikely that the same mistakes will happen again. The unemployment rate is far below what was observed in the 1970s and it is continuing to drop. Keeping the current low rates would allow the recovery to continue, but the risk still remains high if households and businesses come to expect more of the same.
Building a better road ahead
While the current supply chain crisis might be temporary, but its volatile nature could very well leave a permanent mark on the global trade markets as climate change and other disruptions take place. Digital transformation is a part of the solution, but it is even more important that we bring forward a revolution in the way we think of international trade. It is imperative that we move away from vulnerable chains where one broken link causes chaos. We should rather focus on building a global community of trade that supports the agility and end-to-end resilience required to meet future crises with confidence.