The root of input shortages and supply chain problems lies in the first wave of the coronavirus crisis. The imposition of global lockdowns in the first quarter of 2020 is expected to cause a recession worse than that of 2008. The economy took years to recover from the global financial crisis and it has forced companies to reduce their production capacities. However, history has not repeated itself and rather the opposite has happened. Massive fiscal stimulus stabilized incomes and spending preferences shifted from services, such as hotels and tourism, to durable goods. This quickly put pressure on the global supply chain, which was also accentuated by weather disruptions like those seen in Texas and Taiwan and, of course, the blockade of the Suez Canal. Supply chain frictions were first visible in shipping and semiconductor shortages, but have quickly spread to raw materials and now also to labor and energy.
At this point, the industry faces widespread supply chain friction and shortages on a global scale. This, in turn, causes frontloading by worried companies, which exacerbates the problem in supply chains and leads to a significant increase in backlogs, production issues and even downtime, as well as significant pressure on companies. price. The biggest problems still stem from 1) transportation issues and 2) semiconductors, with the container crisis causing greater disruption in the United States, while semiconductor shortages have a greater impact in Europe. .
The share of on-time container ships has continued to decline as semiconductor sales continue to rise
1 Transport problems
Current maritime trade data from international manufacturers shows some improvement in container throughput in September, but masks large regional differences. While container throughput has declined dramatically at Chinese ports, it has increased sharply in European countries like France, Belgium, the Netherlands and Germany. Overall, however, the index remains highly volatile, with persistent logistical disruptions continuing to dampen trade. In addition, the reliability of schedules, a measure of the actual punctuality of individual vessel arrivals at ports around the world calculated by Sea-Intelligence, remains at an extremely low level. Throughout the year, the reliability of schedules fluctuated between 30% and 40%, resulting in the unavailability of 12.5% of the global capacity of cruise ships deployed in August due to disrupted sailing schedules , delays in ports and empty container ships waiting longer to be loaded in congested terminals. . In normal times, the reliability of the schedules is of the order of 70 to 80%.
Beside the problems of maritime transport, the problem of semiconductors is essential because of the strong dependence of certain sectors. The largest production declines were seen in the automotive sector, which is also reflected in the number of companies stating that input shortages are a factor hampering production. It is now closely followed by other sectors also dependent on computer chips. The problem is even more prevalent than that, with most manufacturing sectors now showing record levels of labor and equipment shortages hampering production.
Eurozone supply-side shortages are at record highs for most manufacturing sectors
Why we don’t expect any relief until 2022
The question for the economy as a whole is whether inflationary pressures will persist longer than expected and to what extent growth will be affected. To answer these questions, it is important to get an idea of the duration of the disturbance.
Although most economic indicators have broken their historically high levels over the past two weeks, global demand for goods remains strong and adds to the industry’s already huge backlogs. Plus, with some of the busiest shopping days of the year (Black Friday, Cyber Monday, and Single’s Day in November, followed by the Christmas season and Chinese New Year in February), the pressure will remain high. In addition, shortages cause hoarding behavior among businesses and consumers, leading to excessive demand and new pressures on the supply chain.
Factors in favor of short-term easing are still limited. Extending operating times to 24/7 to reduce cargo congestion, as is done in the United States, helps to some extent, but problems along the lines supply, such as missing truck drivers, will not untie the many knots that hinder global trade smoothly. Although we have reached a peak of bullish momentum in trade as indicated by the latest WTO Goods Barometer – with the forward-looking index for new export orders slowing from 114.8 to 109.3 – the gradual normalization of international transport will take months, not days, which is why the supply frictions will last until 2022.
With demand remaining high due to the many festivities, culminating with the Chinese New Year (February 1 to February 7, 2022), and bottlenecks unlikely to be resolved in the short term, we expect a some relief sets in from the beginning of February. During the Chinese New Year, all factories will eventually close, so the supply of goods from China will be limited, meaning that orders from all over the world can be processed without even more supply from China. . Shipping logistics can at least partially catch up with supply during this period.
In terms of specific shortages, semiconductor shortages are expected to remain a problem for some time. Establishing new production facilities takes years, while demand remains high. This leads us to believe that very tight semiconductor markets will remain in place until 2023. Shortages of chemicals needed for plastics or paint, for example, are also expected to last until 2022, with many petrochemical plants. in the Gulf region still being closed at this time and shipping issues exacerbating the current issues. On top of that, much of the input shortages are currently being exacerbated by shipping issues, meaning those pressures will persist until shipping issues ease in mid-2022.
Watch out for the turning point: are we suddenly going to face overcapacity?
What if the current situation turns around and we face overcapacity, either because of a decline in economic activity or because of an oversupply of ships? In response to recent capacity bottlenecks, orders for carrier vessels have increased sharply. However, the construction times for new ships are long, which means that the ships currently being manufactured will not be available to a large extent until 2023. Therefore, this is unlikely to be an urgent problem. before this date. Additionally, with demand expected to remain robust overall, container flow will remain strong and bottlenecks are expected to persist for some time. Even if there was a sudden drop in economic activity, clearing existing orders will take months as it will take time for things to return to normal throughout the supply chain. However, from 2023 onwards, the risk of excess capacity decreases as demand for catch-up products declines, fleets are expanded, and investments in production capacity for products currently facing shortages lead to increased capacity. .
Inflationary pressure on goods will persist in 2022, but what about 2023?
The impact on inflation is obvious. Pipeline pressures for commodity inflation reached historic highs and began to translate into higher consumer prices. The extent to which this will ultimately be passed on depends not only on the higher input costs, but also on the preference of companies to reduce their margins to maintain their volumes. The latter option is less and less of an option as the disruptions continue, which means that we expect commodity inflation to continue to rise over the next few months and remain high throughout the former. half of the year while pressures on pipelines remain strong. Based on Koester et al. (ECB Bulletin 5/2021), we have created two indices that show the underlying trends of early and late pipeline pressures for non-energy industrial goods inflation in the euro area. The chart below shows that initial pipeline pressures are just above all-time highs, but late pipeline pressures are only getting closer to record readings. This delay suggests that high inflation in goods is still to be expected for the coming months.
Given the current investment in capacity and the likely moderation of demand over time, it is likely, however, that this will translate into further weakening of the inflationary and even deflationary pressures emerging from the supply chain in the United States. during 2023.
Pipeline pressures for commodity inflation in the euro area are very high
Downside risks to growth in H1 2022
From a growth perspective, the continued disruption for most of 2022 remains a major risk to the outlook. Bottlenecks and production stoppages are expected to weigh on GDP growth in most markets, but some more than others. The demand for goods is however essential, because it has not yet decreased despite the ordering times which are increasing considerably in some markets. With new orders still high, expectations are that a continued recovery in GDP is more likely than stagnation. In Germany, for example, we expect growth to improve in 2022 compared to 2021. The main downside risk is more drastic production cuts when shortages turn into bottlenecks. This could lead to larger production shocks and jeopardize the resumption of growth. With services still recovering at a rapid pace, the recovery in global growth is currently on a solid footing, making supply chain issues more problematic for the outlook at this time.