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Home›Volkswagen credit›“A perfect storm”: supply chain crisis could throw the global economy off track | Supply chain crisis

“A perfect storm”: supply chain crisis could throw the global economy off track | Supply chain crisis

By Raymond J. Nowicki
October 2, 2021
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Everything went so well. Successful vaccination programs fueled the global economic recovery after the pandemic, stock markets hit record highs again, and prices rose just enough that fears of deflation are a thing of the past.

But a supply crisis that initially questioned the availability of luxury cars or whether there would be enough PlayStations under our Christmas trees turns instead into a full blown crisis with a lack of energy, labor and transportation from Liverpool to Los Angeles, and from Qingdao to Queensland.

All of the problems are linked in one way or another to the surge in consumer demand after the pandemic, but taken together they threaten what one leading economist calls the “wind of stagflation” that could throw the global economy off track.

Mohamed El-Erian, advisor to insurance giant Allianz and president of Queens’ College in Cambridge, says China’s surprising drop in factory output this week is a clear warning of a global economic slump while prices are still rising rapidly, a doomsday double blow. who nearly sank Britain in the 1970s.

“The supply chain problems are much more persistent than most politicians expect, although companies are less surprised,” he said. “Governments need to rethink quickly because the three elements – supply side, transport, work – come together and blow a stagflationary wind through the global economy.”

Energy scarcity is the clearest example of the problem as more gas stations in the UK are running out of fuel, cities in northern China are rationing electricity and forcing factories in the world’s leading manufacturing nation to close just as Christmas demand peaks in the west.

Both countries were taken by surprise because they lacked reserves in a global scramble for natural gas and oil, the price of which has almost doubled to nearly $ 80 a barrel in 12 months.

Along with ongoing restrictions related to Covid in some large manufacturing countries like Vietnam and a well-documented shortage of components like computer chips, factories simply don’t produce enough.

Volkswagen was one of the automobile manufacturers that had to close plants due to a lack of semiconductors. Photo: Reuters

UK auto production declined 27% year over year in August due to a semiconductor shortage, causing a sharp drop in the number of vehicles exported to Australia, the US and China. On Thursday, Volkswagen, Ford and Opel manufacturers Stellantis again announced temporary closings in Germany due to the chip problem. Opel will close a plant until 2022 – the longest such shutdown to date.

In Japan, the index of finished goods inventories has fallen to a level not yet reached after the earthquake and tsunami disaster in 2011.

But even if they could get their hands on more sources of energy and materials and factories could produce more goods, shipping would still cost more. Drewry’s shipping index, which measures the cost of containers, is increased by 291% compared to a year ago. On some heavily frequented routes, for example from China to the largest European port of Rotterdam, the costs of shipping a container have increased sixfold in the past year.

The problems don’t end when the goods arrive at the port. The labor shortage is a final problem in the increasingly arduous journey of products to their final destination. A shortage of truck drivers in many parts of Europe, partly because of disputes about conditions, partly because of ongoing Covid restrictions, is causing delays.

Flavio Romero Macau, supply chain expert at Edith Cowan University in Western Australia, says the massive backlog of consumers in the wake of the pandemic has put a strain on the world’s finely balanced economic ecosystem.

“Consumers are crazy about buying things because the world is inundated with dollars from government incentives, increased savings, and pent-up demand. PlayStations, laptops, phones, fitness equipment – whatever people are trying to buy them, ”he says.

“Higher demand and limited supply mean inflation: there is no way out. When you put all of these things together, it’s a perfect storm. “

As warnings of impending stagflation mount, more economists believe that central banks may need to act faster to raise interest rates once inflation hits the developed world.

The Bank of England
The Bank of England has signaled that rates could rise next year. Photo: John Sibley / Reuters

The Bank of England has announced that interest rates could rise next year, and the US Federal Reserve has finally signaled the end of its massive pandemic stimulus plan that could drive borrowing costs higher in 2022.

Neil Shearing, chief economist at Capital Economics, said the UK and US are most at risk of overheating to inflation, which has led to central bank action.

“Risks are generally upside and there is a real possibility that inflation will rise to a much higher rate, which would require more policy tightening over time,” he said.

A paradigm shift in monetary policy after years of cheap credit could be accompanied by a realignment of the global economy as countries try to shorten their supply chains and become more self-sufficient through more self-sufficient policies that encourage dependence on imports. Romero Macau believes many companies could seize the opportunity to move production from China, where the cheap labor supply that sparked the economic miracle is drying up, to countries like Vietnam and Mexico. The latter has cheaper labor costs than China, which makes it particularly attractive for American companies.

Richard Flax, chief investment officer at digital asset manager Moneyfarm, said the crisis had already caused politicians and business leaders to rethink.

“Large companies and governments are reviewing their supply chains for critical goods, paying attention to both security of supply and costs. We would expect supply chains in some sectors to shorten in response to Covid, either through reshoring or when companies try to diversify their supply sources. “



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