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Chain reaction – supply bottlenecks adversely affecting the global economy

The synchronised recovery from the coronavirus crisis and reopening of the economy are prolonging the shortage of intermediates. As a result, more and more companies are lowering their profit forecasts for the third and fourth quarters. Other consequences include the shortage of lorry drivers in the United Kingdom (which is also attributable to Brexit) and the delayed calming of inflation rates worldwide.

The ongoing supply bottlenecks following on from the coronavirus crisis and reopening of the economy are weighing on the global economy for longer than had been anticipated. Supply chain disruptions and long delivery times, especially for container shipping, are taking their toll on various sectors. The semiconductor industry is particularly affected, as can be seen from the sustained shortage of chips at automotive companies. Opel, for example, has had to close its factory in the German town of Eisenach until the end of the year due to a lack of semiconductor products. Plenty of other sectors are also reporting shortages and thus finding it difficult to fulfil the many orders on their books. The transport and construction industries are facing shortages, resulting in sharp price rises and a general increase in commodity prices and input costs (e.g. for intermediates). Moreover, energy prices have surged in Europe, China and elsewhere.

  • Chain reaction – supply bottlenecks adversely affecting the global economy

    Shortage of intermediates

    Shortage of intermediates

    Proportion of manufacturers reporting a shortage (%)

    Source: ifo economic survey, 30 September 2021.
  • Impact of supply chain disruptions on companies' business operations

    Impact of supply chain disruptions on companies' business operations
    Source: Statista global, 30 September 2021.

The long delivery times are due to the synchronised global recovery following the lifting of coronavirus restrictions, compounded by the pandemic-related increase in the consumption of goods (compared with services). On the supply side, restrictions are being imposed again and again on manufacturing – including temporary factory closures in Asia – due to the implementation of strict measures to contain coronavirus. According to estimates, delivery times will probably only start to improve in the next six to twelve months.

Profit forecasts being lowered in many sectors

In recent weeks, there has been a rapid rise in the number of companies warning that they might not meet their profit forecasts for the third and fourth quarters. This is not a good sign for the third-quarter reporting season, which starts this month. First and foremost, it is manufacturers that are affected by the supply chain disruptions. The automotive industry is asking itself how big a hit it will take as a result of scaling back production owing to the global chip shortage and how much income will be lost by vehicle and parts manufacturers.

A prominent example is the sporting goods sector. US sporting goods producer Nike has retracted its revenue forecast. Revenue growth is now expected to be in single rather than double digits for the current financial year. Nike manufactures around half of its shoes and some of its sports clothing in Vietnam. The coronavirus pandemic meant that factories in Vietnam were shut for a long period, and production had to be temporarily moved to other countries. The time needed for finished goods to arrive in the US is currently around 80 days, which is roughly twice as long as normal. Freight costs have gone up too. The increase in logistics prices also has the potential to trigger further adjustments to forecasts for revenue and even profit, and not just in the textiles sector. However, many companies are able to pass on rising input prices to customers because demand remains robust.

Brexit fallout resulting in shortages at filling stations

The supply bottlenecks are hitting the United Kingdom particularly hard. Andrew Bailey, Governor of the Bank of England, pointed out that global factors, such as the consequences of the pandemic and the specific knock-on effects of Brexit, are affecting the UK all at the same time. According to the Petrol Retailers Association, around two-thirds of its membership of approximately 5,500 independent filling stations have sold out of fuel. This has resulted in long queues at the pumps in the UK. The problem is that there are too few lorry drivers to deliver fuel to the filling stations. Prime Minister Boris Johnson rejected the accusation that the driver shortage was solely due to Brexit, saying that the phenomenon could be seen worldwide. The government has put the military on standby to help ease the situation. The Business Secretary, Kwasi Kwarteng, has also suspended the competition rules so that companies in the sector can work together to tackle the bottlenecks.

Central banks show concern about prolonged upward price pressures

What impact are the supply bottlenecks having on economic growth? They are likely to slightly delay the return to normal levels of inflation but not stall the current economic upswing, provided that the central banks do not take stringent countermeasures and instead continue to tread carefully and align their monetary policy with a moderate medium-term inflation outlook. In the US, consumer prices saw a year-on-year jump of 5.3 per cent in August, which is significantly higher than the monetary policy target of an average of 2 per cent. Jerome Powell, Chair of the US Federal Reserve (Fed), does not expect inflation to ease in the short term, as he made clear at the central bank conference in Sintra, Portugal. In his view, the shortages of intermediates and commodities will continue into next year. He anticipates that inflation will remain above the Fed’s target in the coming months before falling again. This is because of the upward price pressures created by the shortages. Powell said that the central bank would react in the event that the sustained rise in inflation rates becomes a serious problem. During the conference in Sintra, Christine Lagarde, President of the European Central Bank (ECB), also described the supply bottlenecks as an upside risk for inflation in the eurozone. However, the ECB is still very much in the wait-and-see camp in its forward guidance. Lagarde explained that inflation was being driven by the rise in energy prices from their very low prior-year levels. Although the eurozone’s economy has turned the corner following the crisis, it is not yet out of the woods, although it should be in 2022, she believes. We also assume that the eurozone’s GDP will return to its pre-crisis level with a healthy growth rate of 4.8 per cent in 2022. However, the eurozone economy is unlikely to be back on the growth trajectory from before the pandemic until 2023. The 2022 growth outlook for the US is also good at 4.3 per cent. Given the advanced stage of its recovery, however, it is likely to have already returned to its pre-crisis trend level by the end of 2021, which means that the pace of growth in 2022 will be slightly weaker than that of the eurozone.

 

As at: 01 October 2021.