Disruptions mar world’s commerce
Supply-chain tumult has still not lifted
China’s economy slows. Energy costs soar. Grocery store shelves in some countries empty. Automobile manufacturers and other goods producers around the world shut down because of semiconductor chip shortages. Shipping costs soar and car dealers and even Apple stores have record low inventories. Fast food joints run out of potatoes and carpenters out of wood. Supply chains are disrupted. Inflation lurks.
This is a Great Unravelling of the world’s previously unfettered global trading and economic system. It is a knock-on effect of the pandemic, and pent-up consumer demand, but is also a permanent readjustment of the global system due to geopolitics, trade tiffs, and an intentional decoupling from China by the West and Japan.
For a commodity-based nation like Canada, the news is mostly positive as forestry, mining, and oil companies fetch higher prices for their commodities than they’ve received in years. Oil hit Us$80-a-barrel for the first time in three years last week and natural gas is up — the two key reasons why the Canadian dollar strengthened in recent weeks against the U.S. dollar. But, on the other hand, prices generally are on the rise, and Canada is huge importer of food and manufactured goods. And Canada’s most important manufacturing sector, autos and auto parts, is being hit with chip shortages and reduced orders.
But all the world’s countries are negatively impacted by the supply chain disruptions and these conditions are blowing the world economy off course and impeding a full recovery from the economic fallout of COVID-19.
All of the pillars of prosperity are now wobbly from just-in-time manufacturing to offshore sourcing. The average supply chain journey, from materials to store shelves, involves at least 15 steps and the disruption of just one step creates worldclass backups. This year the cost of transporting a 40-foot ocean-worthy container between North America and Asia soared from US$5,000 to US$27,000.
Added to that quagmire, is the ongoing pandemic as certain regions of the “rich” world as well as the “poor” world continue to go in and out of lockdown. There are also still tens of billions more vaccines to administer. Africa is virtually unmedicated, as is the Middle East while only 35 per cent of people in Latin America and the Caribbean have been vaccinated.
Higher energy prices impede growth. For instance, China shot itself in the foot by banning Australian coal imports in retaliation after Canberra launched a probe into the Wuhan China laboratory where COVID-19 began. Some 70 per cent of China’s power is coal-based and excessive prices have forced huge regional power authorities to shut down access to tens of thousands of factories.
Geopolitically, China has overstepped. Its aggression in the South and East China Seas and bellicosity toward Taiwan, India, and Japan is backfiring, causing corporations to switch production to Vietnam or repatriate it in order eliminate dependency on Beijing. Already, a large portion of Apple’s ipads are produced in Vietnam, along with its Airpods. Japanese manufacturers are shifting production elsewhere or back to Japan, thanks to a US$2.2 billion fund set up to help its companies decouple from China.
The result is that global industrial output now stagnates, according to the Wall Street Journal, which cited the Kiel Institute for the World Economy, a German think tank. This year’s forecast for world economic growth was lowered to 5.9 per cent from 6.7 per cent, due to supply-chain snags.
The danger, according to financial guru Mohamed El-erian, who is adviser to the insurance giant Allianz, is “stagflation” may result — a combination of low growth and high inflation.
If so, central banks may have to move quickly to raise interest rates. That will stymie growth further and will, in turn, affect stock markets and notably Canada. Our governments have the highest indebtedness among G7 nations and Canadians have the highest consumer debt in the world. Buckle your seatbelts.