‘A perfect storm’: supply chain crisis could blow world economy off course | Supply chain crisis

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.

A worker wears a protective mask at the Volkswagen assembly line
Volkswagen was among the carmakers forced to close plants amid a shortage of semiconductors. Photograph: Reuters

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 tsunami 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.

The Bank of England
The Bank of England has signalled that interest rates could go up next year. Photograph: John Sibley/Reuters

The Bank of England has flagged that rates could go up next year, and the US Federal Reserve has at last signalled the end of its massive pandemic stimulus plan that could push up the cost of borrowing in 2022.

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.”