Can We Sail Through the Supply Chain Storm? Disruption delays risk offsetting the post-pandemic economic recovery

By Charles Gorrivan

Off the coast of Southern California, a cargo fleet around the size of the UK Royal Navy is stuck in a jam more congested than traffic on the state’s infamous freeways. Before the pandemic, waiting to disembark was an anomaly. But ports worldwide have experienced ongoing increases in congestion that have slowed shipping and splintered corporate earnings.

The cargo bottleneck on the west coast of the US is only part of the story. Similar scenes are occurring at ports worldwide. In-demand products are out of stock. Grocery shopping is getting more expensive. Energy shortages are jacking up prices and disrupting power grids. The cost of doing business is skyrocketing, experts are sounding alarms about stagflation, and economic growth is slumping. As the world lies ahull through a pandemic-induced economic storm, a supply chain crisis risks capsizing its recovery.

Four related factors are undercutting the global supply-chain scare: pandemic pandemonium, a labour shortage, rising energy prices, and an international trend toward economic protectionism. 

The first and most obvious cause is Covid-19. As the economy shrank year-on-year on an annual basis during the pandemic for the first time since 2009, governments pumped some $10.4 trillion of stimulus into markets. Government cheques buoyed unemployed workers and fortified the social safety net. They also helped change spending behavior. With padded pockets and less to spend on, consumers began buying up durable goods like kitchen supplies, electronics, and gym equipment. Checkout baskets on e-commerce sites ballooned as shoppers stuck at home clicked away their disposable incomes. 

Supply chains, however, have been unable to recover from the pandemic with the same force as consumption. Since early 2020, when factories closed and shipping became more difficult, they have become increasingly and increasingly stretched. On a year-on-year basis, products were out of stock 24% more frequently in August 2021 than in the same period of 2020. The sector with the most shortages has been clothing, followed by sporting goods, baby products, electronics, and pet products. 

Production and distribution failures underscore the lag. Pandemic restrictions in massive manufacturing nations like China and Vietnam, on top of energy shutdowns and shortages of raw materials, have slowed factory production. China has been hit especially hard. The Purchasing Managers Index in the largest export economy contracted for the second straight month in October. Similar shrinkage is occurring across South East Asia.

Distribution has also been downsized. There is a shortage of shipping containers, and in China outbound travel is restricted and shutdowns over positive cases of Covid-19 have created huge backlogs. These delays have stretched global shipping, which accounts for more than 90% of the transportation of traded goods. 

As production and distribution have slowed, consumer spending has changed. A shift began in 2020 when global lockdowns occurred and the workforce was moved inside – working remotely, earning unemployment cheques or furlough – and they largely stopped spending their disposable income on restaurants and going out. Instead, many opted to buy durable products: cars, washing machines, gaming consoles, Peletons, among other goods. Over the four quarters of 2020, durable good spending grew by almost 12%. 

However, factories – such as those that produce the microchips necessary to make most electronics – closed whilst the demand sped up. Panic buying and unpredictable consumer trends also made it difficult for multinational consumer goods, food, and beverage companies to forecast demand and deliver shipments. Planning error was driven by 14% and service levels, which measure a company’s performance delivering products, sank. Although consumer spending on durable goods continued to gain through 2021, companies predicted potential revenues poorly and distribution lines broke down, leading to an imbalance between production and consumption from which supply chains haven’t yet rebounded. 

To make matters worse, there are not enough truck drivers. In the U.K, the Road Haulage Association estimates there is a shortage of more than 100,000 qualified lorry drivers. Without drivers to transport goods on land, supply chains have been starved. Drivers who have left the sector cite poor facilities, challenging hours, and low wages among their reasons for abandoning post. To counter the crisis, companies like John Lewis are raising lorry salaries by up to £5,000 a year. That caps annual Waitrose Large Goods Vehicle Drivers salaries at around £53,780 – more than it pays some of its pensions specialists and financial analysts. But raises won’t shore up the trucker shortage in the meantime. Baroness Charlotte Vere, the Parliamentary Under-Secretary of State in the U.K Department of Transportation, estimated last week that it may take until the end of next year to fill vacancies and mend shortages. 

The lack of truck drivers has made it more difficult to distribute goods. As a byproduct, grocery shopping has become expensive while supplies are limited, a problem deepened by the rising inflation. Inventory in shops and warehouses in the U.K are at their lowest levels since 1983. The market insights firm Kantar reports that the average shopper in the U.K paid £5.94 more for groceries last month than in the same period of 2020. Kantar’s report also found that grocery prices increased by 1.7% in the four weeks before October 3. An upward price trajectory is predicted to continue as the holidays approach, according to the most recent forecast by the BRC-NielsenIQ Shop Price Index. The issue isn’t isolated to the U.K either. In the U.S, Thanksgiving dinner this year may be the most expensive in the history of the holiday, and Aperol Spritz lovers everywhere are paying more for a drink. Worldwide, world food prices have hit a 10-year peak

Rising energy prices are another caveat in the crisis. Wholesale natural gas prices have soared as energy demands have swelled, natural resources have become scarcer, and carbon prices have climbed in the European Union’s emissions-trading scheme. The BBC reports that since January, gas prices have jumped by 250%. Household energy bills are rising, petrol stations are running out of fuel, energy companies are going under, and small firms are struggling to meet rising costs. Shortages have caused outages at factories in China and slowed distribution lines. The crisis is expected to worsen through the winter as energy demand grows because of its role in heating. 

To fill energy gaps, the Chinese government has increasingly reverted to dirtier energy sources. They are expanding coal mines and demanding that coal-fired power generators sell into the wholesale market. While that may help supply chains, it is cause for environmental concern. The switch is driving up global CO2 emissions, which could hinder investment in low-carbon technologies. That is bad news in a year when more than 500 regional temperature records have already been broken.

Economic protectionism is the final culprit of the supply chain crisis. As countries have become wary of striking international trade deals, cross-border movement has slowed. According to the Center for Economic Policy Research, the number of exports from G-20 countries subject to trade measures has risen by 30% since 2009. The UK’s shortage problem is a prime example of the impact of economic protectionism on supply chains. In the Office for Budget Responsibility’s most recent report, they suggested that massive reductions in trade and migration caused by Brexit have made the impact of shortages on the UK economy worse relative to the rest of the world. 

The supply chain crisis cannot be ignored. Together, these influences – pandemic pandemonium, labour shortages, an energy crisis, and the growth of economic protectionism – are sending tremours through the world economy. Expensive holiday shopping won’t be the only impact of the supply chain crisis if action isn’t taken. The cost of business is rising, economists are forewarning stagflation, and the transition to green energy is in jeopardy. Last week, Moody’s analysts wrote that “supply-chain headaches show no sign of subsiding just yet.” The IMF has also warned that the supply chain crisis and rising inflation have the potential to offset pandemic recovery. 

As governments intervene to help clear up supply chains, they should use this opportunity to tackle the longstanding structural issues that made supply chains susceptible to panic in the first place. Reconstructing supply chains is a chance to strengthen distribution networks, raise the quality of life for workers, and accelerate the shift to renewable energy. The moment also highlights the growing need for cooperation in the international system. While politicians may find it tempting to blame foreign countries for the crisis and champion self-reliance, protectionism rally cries only make matters worse. The summit U.S. President Joe Biden assembled on Sunday at the annual gathering of G-20 leaders to discuss the crisis is a step in the right direction, but more formal discussions between world leaders must be organized to brainstorm multilateral solutions. 

The world is in the midst of an economic tycoon. The direction that the world economy takes during this crisis will determine whether post-pandemic recovery efforts are bound for calmer waters or another storm. In the meantime, we all need to hold fast. 

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s