Supply chain constraints may have peaked in 2021
Supply chain pressures remain well above pre-pandemic levels, but there are signs that global trade relations could begin to normalize this year, even as many countries face an increase cases of the Omicron variant coronavirus and persistently high inflation.
A gauge of global supply chain stresses produced by the Federal Reserve Bank of New York shows those pressures peaked in October 2021. But the index – which is based on 27 variables, including supply prices Global shipping and air freight costs – ticked slightly lower in November and December.
Some analysts believe the pressure in some areas will continue to ease over the coming months.
“Over the next year, it seems likely that some supply chains will resolve on their own while others may prove more persistent,” said Simon Edelsten, fund manager of Artemis Global Select and the Mid Wynd Investment Trust.
The rapid reopening of the global economy had “taken some by surprise last year,” Edelsten said. But some sectors, such as the auto industry – which had suffered from semiconductor shortages – “appear to be improving”, he added, citing recent sales figures from Toyota and Tesla.
Businesses around the world have been hit by pandemic-related pressures, such as factory closures and bottlenecks, as the introduction of border restrictions by many governments has coincided with consumer demand for booming. Disrupted logistics networks have driven up shipping costs and delayed deliveries.
“Last year was a perfect storm for supply chains. Not only did Covid disrupt production, but fiscal stimulus boosted demand and the closure of the Suez Canal caused months of disruption,” said Guy Foster, chief strategist at wealth manager Brewin Dolphin.
Supply chains could prove more resilient this year as inflation hits consumers’ purchasing power and more businesses adjust to Covid-safe production protocols. Additionally, a holiday overorder could allow inventory to replenish as older shipments arrive, Foster said.
Supply chain tensions have contributed to the persistence of high inflation. New figures released on Wednesday showed consumer prices in the United States rose 7% a year in December, their fastest pace in nearly 40 years. Separate data showed on Thursday that wholesale prices in the United States rose at an annual rate of 9.7% last month, although that was slightly below economists’ forecasts.
Even though macroeconomists are generally optimistic about the year ahead, most indicators of supply chain stress remain much higher than before the coronavirus. Container shipping rates peaked in October but are still more than five times their January 2020 level, according to data provider Harpex.
Richard Flax, chief investment officer at digital wealth manager Moneyfarm, expects supply chain recovery to happen “slowly” over the course of 12 to 18 months. Improvements related to investments in better supply security and factory efficiency will take time, he added.
Timothy Fiore, president of the Institute for Supply Management, noted “indications of improvement” in supplier labor resources and delivery performance. But customer inventory levels remain very low, while order books “remain at a very high level”, he added.
“The fly in the ointment is China,” said Foster, who sees “major risk” to supply chains this year. A new wave of coronavirus infections, coupled with China’s “zero-Covid” policy, could lead to port closures, further disrupting shipping, he said.