Supply Chain disruptions as well as congestions and blockages in the productions system have become a major challenge for the global economy since the start of the pandemic. Consumers around the world are warned of shortages of supply of many daily necessities in coming months. In fact, many market analysts believe the global supply chain disruptions would even get worse.
Shoppers have inundated social media with pictures of empty shelves at major retail and grocery outlets. Supply bottlenecks are not the only bottlenecks, there are also bottlenecks on the demand side further aggravating the situation. A kind of a new normal is emerging.
In recent times there has been a sharp drop in delivery times and that reflect surging demand and widespread supply constraints. These supply chain delays can reduce the availability of intermediate inputs which combined with the current labour shortages can slowdown output growth creating further shortage of consumer goods pushing up prices.
According to a report prepared by Moody's "As global economic recovery continues to gather steam, what is increasingly apparent is how it will be stymied by supply chain disruptions that are now showing up at every corner". In fact, global financial officials who met in Washington last month did post a warning saying that the supply chain bottlenecks, which are already driving prices higher, threaten to derail the post-Covid economic recovery.
International Monetary Fund (IMF) Chief Kristalina Georgieva also expressed her concern over supply chain disruptions and said the lag in vaccination rates to contain the pandemic in developing countries was contributing to the supply constraints and "as long as it widens, this risk of interruption in global supply chains is going to be higher".
The rapid spread of the virus in 2020 prompted shutdowns of industries around the world and most of us were also in lockdown at home. So, there was reduced industrial activity and lower consumer demand. The pandemic related travel restrictions also further added to the problem. The pandemic has affected industrial production in exporting countries like Bangladesh and other Asian countries as factories were shut down with flow on effects on import destinations like America and Europe.
That marked the slowest GDP growth in most industrialised countries including the US which recorded a plunge in GDP by 31.2 per cent in the second quarter of 2020. During this time Covid-19 also morphed into a global pandemic resulting in sever economic shutdown in most industrialised countries.
As lockdowns have been gradually easing, demand for goods and services are rising. The manufacturers and suppliers are now unable to supply as much as they could in pre-pandemic period. In fact, demand for goods is rising much faster than services.
There are many reasons for this supply demand mismatch. These largely include a lack of key components and raw materials. From the second quarter of 2021 major global economies saw a major clogging up of supply chain which is now negatively impacting economic growth. The US economy grew at a 2 per cent rate in the third quarter this year, the slowest since the pandemic emerged. The problem has been further compounded by labour shortage.
Supply chains are global in nature and depend on ports, containers, railways, trucks and warehouses. The tightly calibrated system designed for perpetual motion is becoming increasingly crisis-prone. Once one link breaks down, its impact can be felt along the whole supply chain immediately.
Now every stage of this international supply chain is breaking down in its own way. The Year 2021 is shaping up to be the year of supply chain disruptions. The problem is global in nature.
The pandemic has disrupted nearly every aspect of the global supply chain, making all kinds goods difficult to obtain. Now soaring demand for goods over services is further contributing to clogging the system for transporting goods to the factories and finished goods pile up because of a shortage of shipping containers.
To further complicate the situation there are issues of trans-shipments -- containers dropped off by one ship is being refused to be picked up by another for the last leg of the voyage creating a chaos due to lack of space and clogging at ports. Some experts believe that a quick relief from supply chain disruptions is unlikely.
The chaos in global shipping is likely to continue as a result of the massive congestion at ports. US Federal Reserve Chair Jerome Powell said that he expected supply chain disruptions to continue well into next year. The pandemic has only further highlighted how interconnected the global economy is and how easily that interconnectedness can be destabilised.
Since the Global Financial Crisis (GFC) of 2007-08, the global economy has been faced with the problem of spending. Also, government austerity measures and lack of private investment in physical capacity and low wages added to sluggish growth. The roll out of corona virus vaccines has helped the global economy to slowly emerge from the pandemic.
Now as the global economic recovery continues to gather steam, spending has come roaring back. Immediate cause is Covid-19 which led to rising household savings and about US$10.4 trillion global stimulus package together contributing to a spending spree, especially on goods than normal at a time when goods are in short supply.
A combination of strong demand and limited supply is pushing up prices. The annual inflation rate for the US is 5.4 per cent for 12 months ending September, 2021. Rising consumer demand is fueling inflation which is running 30 years high in the US.
With rising commodity prices, wages growth and supply disruptions, price pressures are expanding across all major economies around the world as they begin emerging from long coronavirus lockdowns.
While all major industrialised economies including the US economy are not yet experiencing a downturn akin to the 1970s period of stagflation, but there is dearth of a range things - semiconductors, car parts, ships, shipping containers, workers and others.
In the case of workers, it is the work place safety that is preventing them to go back to work. Labour shortage will only ease when workers feel comfortable to return to work.
A shortage, in economic terms is a condition where the quantity demanded is greater than the quantity supplied at the market price. Such a situation leads to price rise to bring the market into equilibrium. Supply shortages, therefore, lead to rising prices or more precisely inflation. Prices also go up when the economy stagnates.
Now there is a general consensus among economists that inflation is more persistent and sustainable. The commodity price surge has brought the fear of stagflation on to the centre stage as happened in the 1970s. Paul Krugman, however, argues in a newspaper article that "probably the best parallel is not with 1974 or 1979 but with the Korean war, when inflation spiked, hitting almost 10 per cent at an annual rate, because supply could not keep up with surging demand".
Europe and China are also experiencing growth problems on the back of supply chain disruptions. China reported its third quarter GDP growth at a disappointing rate of 4.9 per cent from the previous quarter as industrial activity slowed down. Germany is also hit by supply bottlenecks affecting its export oriented manufacturing sector.
The combination of inflation and slower economic growth is causing serious concerns for economic policy makers so much so that a fear of looming stagflation is very much in their mind. When the economy slows down, the government and the central bank can stimulate the economy by cutting interest rates or increasing government spending and/or tax cuts or a combination of all these. But the policy measures can not help solve the problem when the problem is with supply, not demand.