Express news service
Most of us have done this at least once. That is, by pressing the reset button on the smartphone to turn it off and eliminate the virus. For best results, we even tried a deep clean or restart, which restores factory settings meaning the device is like new. Simple, really.
So when Covid-19 hit last year, policymakers around the world did pretty much the same. They hit the reset button, hoping, or rather praying, that subsequent blockages and takeoffs will bring things back to normal. For good, they even called it the Big Reset.
But the global economy is not your regular phone, and what seemed like a gradual and smooth recovery process now seems to be spewing out problems of inevitable proportions. Foremost among the looming problems is the disruption of the global supply chain, which could lead to a recession in inventories or a slowdown in the global economic recovery. It seems like we can’t chuckle and have to deal with one of the two. Worse yet, some have even pointed to doomsday scenarios, predicting that price pressures will turn into stagflation, which could then sway the global economy. China’s dramatic slowdown in the last quarter puts these forecasts at a standstill.
Among other things, the pandemic has endangered world trade. Moody’s Analytics warned of “dark clouds ahead” as several factors make it difficult to resolve supply constraints. The main culprits this time are manpower, overloaded shipping lines and rising costs of raw materials and logistics.
First, companies face shortages like labor, energy (remember coal shortages), and critical industrial components like computer chips for cars. Second, even though companies produce goods, shipping lines are so congested that crossing an ocean from one end to the other is taking twice as long as before the pandemic, if not longer. And finally, even as goods move in and out of shipping ports, some countries like the UK are facing a severe shortage of truck drivers delaying deliveries.
India is in the midst of an energy crisis – like many others around the world – mainly due to the scarcity of coal. The situation was exacerbated by the disruption of the supply chain resulting in high import costs. This impacted both electricity consumers and non-coal consumers.
N Venu, Managing Director and CEO of ABB Power Products and Systems India Limited, recently told an analysts meeting that while demand for electricity is expected to increase 8-8.5% in the fiscal year 22, the risk of an electricity crisis resulting from coal shortages could dampen supply and hit production in basic industries, slowing the pace of economic recovery.
“The high build-up of inventory at our factories, primarily for our high-demand products, due to the crisis in supply lines, deferred revenues and high input costs has impacted our cash flow.” , did he declare. Consumers in the non-energy sector, including captive power plants (CPPs), aluminum, steel, cement, sponge iron, chemicals, paper, etc. subsidiaries, decried the Coal Consumers Association of India in a letter to the Coal Secretary.
“Steadily rising global coal prices along with high sea freight tariffs have also made importing coal almost impossible for these consumers to make up for the lack of supply from local sources,” he said in the letter. FMCG companies from Unilever to Nestlé to Procter & Gamble struggling with supply difficulties have no choice but to raise prices. But that’s only part of the problem. Perhaps, as part of their civic duty, companies are warning consumers of the high price levels that will continue next year, citing a “once in two decade inflationary environment.”
“We continued to see unprecedented levels of inflation in some of our key inputs. Palm oil and its derivatives, which are used in our skin cleansing and hair care categories, have seen their prices rise further, ”said Ritesh Tiwari, Chief Financial Officer of Hindustan Unilever, at a meeting of analysts.
Automakers have faced a severe shortage of chips, as evidenced by significant product cuts by local manufacturers.
Recently, Crisil Ratings and India Ratings slashed growth forecasts for the Indian passenger vehicle (PV) market amid a growing semiconductor shortage that has forced India’s largest automaker Maruti Suzuki and others to scale back. considerably their level of production in recent months. While Crisil expects the PV market to grow 11-13% year-on-year in FY22 compared to the previous forecast of 14-16%, India Ratings expects the growth to grow. moderates to 15-18% year-over-year in FY22 compared to the previous estimate of 18-22%.
The enormity of the situation
According to the OECD, rising global commodity prices and shipping costs are currently adding 1.5% to inflation in G20 countries. By December, it could increase by 1.75% and again by 1% in 2022. Worryingly, the OECD believes that the brake on the pandemic and bottlenecks is unlikely to abate in 2021.
As it stands, global production in mid-2021 was 3.5% lower than forecast before the pandemic, resulting in a one-year shortfall in production growth in normal times. Our own RBI, in its monthly bulletin last week, sounded the alarm by noting that resurgent demand everywhere was being stifled by supply bottlenecks, jeopardizing the global recovery. Indeed, the disruptions in the supply chain seem to feed one another, amplified simultaneously by the dynamics of decarbonization and trade wars. “There is also the possibility of facing an inventory recession when the supply backlog is finally cleared,” RBI warned.
Port congestion in the United States, Europe and Asia has disrupted shipping schedules and equipment shortages, especially in exporting countries, and created disruptions in supply chains. The average cost of shipping a large standard container (a 40ft equivalent unit or FEU) is five times higher than a year ago. The average door-to-door shipping time for ocean freight has been reduced from 41 days a year ago to 70 days.
In October, the World Trade Organization increased its projection of the volume of world merchandise trade in 2021 to 10.8%, from 8% in March. While in Q2 trade volume growth climbed to 22%, for the rest of the year it is expected to slow to 10.9% in Q3, followed by 6.6% in Q4. The more optimistic estimate is that the disruptions could take a year to dissipate, while the worst-case scenario is a slowdown and reorganization in world trade, according to RBI. And as Moody’s Analytics noted, it’s going to get worse before it gets better. Buckle up.
Cloudy water trade
- Shortage of manpower, overloaded shipping lines, rising costs of raw materials and logistics are some of the main obstacles
- Electricity demand is expected to increase by 8-8.5% in FY22, but the risk of an electricity crisis resulting from coal shortages could dampen supply and affect industrial production
- Consumers in the non-energy sector, including captive power plants (CPPs), aluminum, steel, cement, sponge iron, chemicals, paper, etc., face a severe shortage of coal
- Automakers have faced a shortage of chips, which has led to sharp production cuts in the recent past
- Rising commodity prices and global shipping costs currently add 1.5% to inflation in G20 countries, according to the OECD, and could reach 1.75% by December.