Supply chain chaos is hitting global growth and could get worse
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On Wednesday, October 13, 2021, cargo trucks were parked at Los Angeles’ Port of Los Angeles.
Bloomberg | Bloomberg | Getty Images
Global economic recovery is slowing taking place thanks to coronavirus vaccines.
Covid-19, however, has created a very dangerous economic problem: disruption to global supply chain.
In 2020, the virus spread quickly and caused many industries to shut down around the world. Although most were held hostage, the demand for goods and services was much lower.
The demand for goods and services has increased as lockdowns eased. The supply chain disruptions that occurred during the global healthcare crisis pose huge challenges for those who are trying to recover.
The result has been chaos for manufacturers and retailers of goods, who are unable to produce and supply the same amount as before the pandemic. There have been a number of factors that led to this situation.
Different regions have faced supply chain challenges that were exacerbated by different factors. Power shortages in China in recent months have impacted production, while Brexit is a major factor that has led to a lack of truck driver drivers in the U.K. Both the U.S. and Germany are also facing a shortage in truckers. Germany also has large backlogs at its ports.
Continue reading: As the U.K. battles food, fuel and labor crises, Boris Johnson promises change
The situation ‘will get worst’
Moody’s Analytics’ Tim Uy, an expert on supply chain management says that problems in the supply chain “will continue to get worse than they get better.”
Uy stated that as the world’s economic recovery gains steam, it is becoming more apparent how supply-chain disruptions will impede its progress. He made this statement in a Monday report.
He said that “Border restrictions and mobility restrictions, the unavailability a global vaccination pass and pent up demand from being trapped at home all have created a perfect storm in which global production will be hindered because delivery delays will result in increased costs and higher prices, and global GDP growth will not be as strong as it should be.”
“Supply will likely play catch up for some time, particularly as there are bottlenecks in every link of the supply chain—labor certainly, as mentioned above, but also containers, shipping, ports, trucks, railroads, air and warehouses.”
As The Port of Los Angeles opens its doors to the public, a sea of trucks lining up to get in will be waiting in line. The port’s opening is scheduled for Wednesday, October 13, 2021 at San Pedro, CA.
Los Angeles Times | Los Angeles Times | Getty Images
Supply chain bottlenecks — congestion and blockages in the production system — have affected a variety of sectors, services and goods ranging from shortages of electronics and autos (with problems exacerbated by the well-known semiconductor chip shortage) to problems in the supplies of meat, medicines and household products.
Due to higher demand from goods in limited supply, freight prices for goods from China have skyrocketed. However, a lack of truck drivers has made it more difficult to transport goods between the two regions. The result has been high retail prices as a result.
This pandemic only serves to show how interconnected global supply chains can become, as well as how easy they can be destabilized.
When global supply chains work well, they can lower the costs of businesses due to sometimes lower labor and operational costs associated with the producer of the product. This is a good thing that can stimulate innovation and spur competition.
However, the pandemic revealed deep fragilities within these networks. Disruption in one section of the chain has a ripple-down impact on all other parts, including manufacturers, suppliers, and distributors. This disruption ultimately affects consumers and economic development.
Growth is hit by supply chain crisis
While economies are getting back on track, the supply-chain crisis is becoming a key issue for governments. The covid-weary are keen to shop again, but they are discovering goods that are either unavailable or more costly.
This issue has become a major concern ahead of Christmas. Last week, White House officials warned Americans that they could see higher prices and fewer shelves during the holiday season. The Biden administration is trying to reduce blockages at ports.
Continue reading: White House plan aims to help key West Coast ports stay open 24/7 to ease supply chain bottlenecks
China and Europe both are experiencing problems in growth because of issues with their supply chains. China announced Monday that it had reported that the third quarter GDP grew by 4.9% compared to the prior quarter. However, industrial activity in September rose 3.1% less than the expected 4.5% according to Reuters. — with supply chain issues contributing to the slowdown in activity.
“Manufacturing was hit hard by supply chain disruptions due to Covid as some port operations were hit in the third quarter of 2021, and chip shortages continued in the quarter,” Iris Pang, chief economist of Greater China at ING, noted Monday.
She said that “supply chain disruptions are expected to last as freight rates are still high and chip shortages are still a critical issue for industries like equipment, automobiles and telecommunication devices.”
Germany’s leading economists last week warned of “supply-related bottlenecks” that would continue to impact manufacturing production. They were expected to slow growth in Germany’s largest economy, Germany.
Impact on earnings
Experts say that the effects of the supply chain crisis are already beginning to impact earnings. Kristina Hooper, Invesco’s Global Market Strategist noted that supply chain worries are already brewing“Many U.S.-based companies have voiced concerns over rising supply chain costs, and possibly lower earnings.
Hooper believes that some factors contributing to supply-chain problems, like the shortage of labor, can be addressed sooner than expected. She said that some sectors could be affected by the issue for longer periods of time.
In a note, she stated last Thursday that “Regardless of where they are located, they are likely to experience supply chain disruptions. They will also be experiencing higher input prices and issues sourcing labour.”
However, there will be some businesses that will be more affected than others. A rise in costs will usually have the largest impact on low-margin firms, which are often found in transportation, general retail and construction. People with small staffs and high profit margins are the best companies to be impacted. She said that this should also include tech growth and healthcare. However, bond yields may rise temporarily, so stock prices in these sectors could be affected.
The standouts of this environment may include financials, which would be especially attractive to companies that are looking for higher yields. A key factor that may distinguish these companies is the amount of technology investment they have made to boost productivity.
Hooper pointed out that there are some shortages of semiconductors. However, Hooper projects that production will return to its normal level by the end of 2022. However, supply disruptions that are more widespread in the near term are expected to persist, especially if additional Covid wave events occur,” Hooper said.
“In general, supply chain disruptions and higher input costs seem likely to be relatively transitory … And so, for me, I’ll be paying close attention to this quarter’s earnings season, but I’ll be most concerned about companies’ guidance for the fourth quarter and beyond — especially how long they expect these conditions to last,” she said.
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