Global supply constraints ease – but challenges still abound
Last year could have been a breeze for the global economy were it not for the supply chain disruptions that saw everything from rubber and food through to semiconductors and Christmas stocking-fillers not only cost much more but take significantly longer to get to their destinations.
There are early indications that these supply constraints may be easing, with global shipping costs moderating by 16% late last year from their September peak and the broader-based Federal Reserve Bank of New York’s gauge of global supply constraints slowing from its October high point. But it’s worth noting that container costs remain four times their pre-pandemic rate.
For the first few weeks of January, all eyes have been focused on the interest rate trajectory that central banks in developed markets are likely to pursue, with as much as four interest rate hikes now expected in the US.
But it’s supply chain measures that deserve close watching because, as the force behind last year’s inflation uprising, they will largely determine the rapidity and extent of interest rate increases during 2022.
The IMF suggests that there could be light at the end of the tunnel but cautions that pressures do remain and that shipping rates could remain elevated. In addition to backlogs and port delays, there are no quick fixes for labour shortages, supply chain disruptions moving inland as well as shipping industry challenges, such as slow capacity growth and a highly concentrated nature of the global market in carriers.
To solve what could otherwise remain long-term headwinds, the IMF says: “Returning to pre-pandemic shipping rates will require greater investment in infrastructure, digitalization in the freight industry, and implementation of trade facilitation measures.”
In the shorter term, the risks facing the global supply chain remain the usual suspects: Covid-19 and any new variants, the state of the Chinese economy, and the gap between consumer demand for goods and the supply capacity to meet these.
The Omicron variant appears to be changing the trajectory of the pandemic, with debate over whether it marks the shift to a world in which Covid-19 becomes endemic.
Should that be the case, the global economy could return to business as usual, with policymakers focusing on unravelling the financial measures put in place to bolster the Covid-19-wracked global economy. If more virulent strains emerge, supply chains will be further disrupted and economic recoveries undermined.
The World Bank has estimated possible downside risks for growth from Omicron, with global growth adversely impacted by between 0.2 to 0.7 percentage points. It adds: “The associated dislocations could also aggravate supply bottlenecks and exacerbate inflationary pressures.”
Omicron-driven growth
The latest World Economic Outlook paints a picture of a global economy already expected to slow from its 2021 rebound, with growth expected to be 4.1% in 2022 versus 5.5% last year. Its forecast factors in “continued Covid-19 flare-ups, diminished fiscal support, and lingering supply bottlenecks”.
China, to a large extent, holds the key to the outlook for the rest of the world, given how much it imports and exports.
Robeco strategist Peter van der Welle says: “In 2022, China will likely be top of mind for investors, even disregarding the Winter Olympics to be held in Beijing in February. China as a single country has determined around 30-40% of annual global GDP growth in the recent decade, and it led the global economic cycle into recovery in 2020.”
As one of the few remaining countries to still be pursuing a zero-Covid policy, its economy is most at risk of the spread of new variants. Harsh shutdowns have been imposed to eradicate Omicron.
China’s 2022 economic outcomes are arguably likely to be the most unpredictable of the largest countries. It is still trying to put out short-term fires like the fallout from the Evergrande property company default, while steering the economy to its long-term target of achieving common prosperity. Economic growth for 2021 came in at 8.1%, ahead of its 6% target, but this year the World Bank expects it to achieve 5.1% and, in 2023, 5.3%.
ING Greater China chief economist Iris Pang is confident that as the global economy recovers, stronger global demand for goods will translate into stronger international trade for China. But she notes that the challenges will continue to be freight delays and semiconductor shortages.
For now, however, 2022 seems to be getting off to a far gentler start than 2021.