Author: Drishti Dhakan, Investment Analyst at Xanara

Last year the global economy came juddering to a halt. This year it got moving again, only to become stuck in one of history’s biggest traffic jams. We are seeing supermarkets with empty shelves and ports where ships are stuck up far offshore. Container shipping rates, for instance, were more than five times higher in September 2021 than they were in September 2020. Car plants have held back output due to a lack of semiconductor chips. Emerging over all of these – rising price tags on almost everything.

Central bank’s view that inflation is “transitory” may be forced to counter rising prices with earlier-than-expected interest-rate hikes could pose new threats to an already slow-moving recovery, and could take the air out of the bubbly equity and property prices. It’s not just a problem of moving stuff around. The world is still struggling to make enough stuff too.

In Vietnam, factories that make Nike shoes had to scale back output because migrant workers had absconded to their home provinces out of fear of Covid-19. China, the world’s manufacturing powerhouse, is confronting new virus outbreaks and responding with targeted lockdowns. Its factory prices are rising at a 10% annual rate, the fastest since the 1990s.

Global automakers have also taken a hit. The typical new vehicle uses about 1,400 semiconductor chips, and with these in short supply, many of the world’s leading automakers have been forced to cut production by temporarily closing down some of their manufacturing facilities. The impact on sales has been disastrous. Even tech giants like Amazon and Apple who have successfully bent supply chains to their will don’t see the situation improving fast. To meet the demand for the upcoming holiday season, retail giants like Walmart & Target are chartering their own ships to cope with the inflated costs.

The US saw a strong earnings season but the supply chains & cost were a point of worry for the investors. Hence, we saw many enterprises take a hit. When these global enterprises face supply chain issues, it means potentially higher operational costs and lower inventory. The prospects of lower demand could prove hostile to disburse resources.

What comes next is unexplored territory partly because of the number of bottlenecks along the route from assembly lines to shopping baskets. As one supplier waits for another to deliver, the delays are feeding on each other. Logistic systems usually ride the ups and downs of the global economy in a predictable pattern: Rising demand boosts trade, pushing shipping rates up and good times for cargo carriers, until they over-build capacity. But the pandemic has thrown that cycle out of line. Even amid signs of slowing growth, the pipeline of international commerce has never been so clogged.

A longer-term fix means getting Covid-19 under control, building new infrastructure such as more efficient ports, and improving technology for digital transactions and faster communication. For a global economy exiting the deepest recession in recent history, supply shortages caused by strong demand are a good problem to have. Clearly, worse would be the opposite of that – abundant supply because economies remain depressed, with millions unemployed.

Inflation is already running high enough to be outside the comfort zone for monetary policymakers. In the U.S., it’s at 5.4% now and could stay lodged in the 4% to 5% range next year if supply constraints don’t ease, according to Bloomberg Economics models. That doesn’t mean the world is in for a re-run of 1970s-style stagflation. It took a decade of overheating and policy missteps to drive U.S. inflation above 10% back then. The Fed and its peers are unlikely to make the same mistakes again. And unemployment is far below its 1970s peaks and falling.