‘A perfect storm’: supply chain crisis could blow
world economy off course
From Liverpool to LA, shortages of energy, labour and
transport are threatening recovery from Covid
How the supply chain crisis is affecting six big
economies
Cargo ships filled with containers dock at the Port of
Los Angeles
A record number of cargo ships are stuck off the
California coast amid a supply chain crisis that could mean fewer gifts and
toys for Christmas this year.
Martin
Farrer in Sydney
Sat 2 Oct
2021 10.00 BST
It was all
going so well. Successful vaccination programmes were driving the post-pandemic
recovery of the global economy, stock markets were back at 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 over the availability of
luxury cars or whether there would be enough PlayStations under our Christmas
trees is instead morphing into a full-blown crisis featuring a shortage of
energy, labour and transport from Liverpool to Los Angeles, and from Qingdao to
Queensland.
All the
problems are in one way or another tangled up in the surge of post-pandemic
consumer demand, but taken together they threaten what one leading economist
calls a “stagflationary wind” that could blow the global economy off course.
Mohamed
El-Erian, and adviser to the insurance giant Allianz and president of Queens’
College, Cambridge, says this week’s surprise fall in factory output in China
was a clear warning that the world economy could slump while prices were still
rising quickly, a doomsday double whammy that almost sank the UK in the 1970s.
“The supply
chain problems are much more persistent than most policymakers expected,
although companies are less surprised,” he said. “Governments are having to
rethink quickly because the three elements – supply side, transport, labour –
are coming together to blow a stagflationary wind through the global economy.”
Energy
shortages are providing the starkest illustration of the problem, with
increasing numbers of petrol stations in the UK running out of fuel, and cities
in northern China having to ration power and force factories in the world’s
number one manufacturing nation to shutter just when pre-Christmas demand is
reaching a peak in the west.
Both
countries have been caught out by not having enough reserves amid a scramble
throughout the world for natural gas and for oil, which has almost doubled in
price in 12 months to nearly $80 a barrel.
Along with
ongoing Covid-related restrictions in some large manufacturing countries such
as Vietnam, and a well-documented shortage of components such as computer
chips, factories are simply not producing enough.
British car
production dropped by 27% year on year in August as a lack of semiconductors
and led to a big drop in the number of vehicles exported to Australia, the US
and China. On Thursday, Volkswagen, Ford and Opel maker Stellantis announced
fresh temporary closures in Germany because of the chip problem. Opel is
closing a plant until 2022 – the longest such stoppage so far.
In Japan,
an index of stocks of finished goods has dropped to levels not even seen in the
wake of 2011 earthquake and tsumani disaster.
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.
Drewry’s shipping index, which measures the cost of containers, is up 291%
compared with a year ago. On some busy routes, such as from China to Europe’s
biggest port Rotterdam, the cost of shipping a container has risen sixfold in
the past year.
The
problems don’t end when the goods arrive at a port with labour shortages
presenting a final problem in the increasingly tortuous journey of products to
their final destination. A lack of truck drivers in many parts of Europe,
partly because of disputes over conditions and partly because of ongoing Covid
restrictions, is causing delays.
Flavio
Romero Macau, a supply chain expert at Edith Cowan University in Western
Australia, says that massive pent-up consumer demand in the wake of the
pandemic has strained the world’s delicately balanced economic ecosystem.
“Consumers
are crazy to buy things because the world is awash with dollars from government
stimulus, higher savings and pent-up demand. PlayStations, laptops, phones, gym
equipment – you name it people are trying to buy it,” he says.
“Higher
demand and restricted supply equals inflation: there’s no way out of it. You
put all these things together and its a perfect storm.”
While
warnings increase about the threat of stagflation, more economists believe
central banks might have to move more quickly to raise interest rates if
inflation takes hold across the developed world.
Neil
Shearing, the chief economist at Capital Economics, said the UK and the US were
most at risk from overheating into inflation, leading to central bank action.
“Risks are
generally skewed to the upside and there is a real possibility that inflation
increases to a much higher rate that would, in time, necessitate a more
substantial tightening of policy,” 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 more autarkist policies, which promote
non-reliance on imports. Romero Macau believes many companies could take the
chance to move manufacturing away from China, where the supply of cheap labour
that launched its economic miracle is drying up, to countries such as Vietnam
and Mexico. The latter, he said, has cheaper labour costs than China, making it
attractive especially for American companies.
Richard
Flax, the chief investment officer at digital wealth manager Moneyfarm, said
the crisis was already prompting a rethink by policymakers and business
leaders.
“Large
corporates and governments are reviewing their supply chains for crucial goods,
with a mind towards security of supply as well as cost. We would expect to see
supply chains in some sectors shorten as a response to Covid, either via
reshoring, or as companies try to diversify their sources of supply.”
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