Supply chain pressures remain well above pre-pandemic levels, but there are signs global trade relations could start to normalize this year – even as many countries face rising cases of the Omicron variant coronavirus and one face sustained high inflation.
A measure of global supply chain constraints produced by the Federal Reserve Bank of New York shows that these pressures peaked in October 2021. But the index — which is based on 27 variables including global shipping rates and air freight costs — ticked slightly lower in November and December.
Some analysts expect pressures in certain areas to ease further in the coming months.
“Over the next year, it seems likely that some supply chains will resolve themselves while others may prove more resilient,” said Simon Edelsten, manager of Artemis Global Select Fund and Mid Wynd Investment Trust.
The rapid reopening of the global economy “surprised some over the past year,” Edelsten said. But some sectors like the auto industry – which has been suffering from semiconductor shortages – “appear to be improving,” he added, citing recent sales numbers from Toyota and Tesla.
Businesses around the world have been hit by pandemic-related stresses such as factory closures and shortages as many governments impose border restrictions coincided with booming consumer demand. Disrupted logistics networks have resulted in rising shipping costs and delayed deliveries.
“Last year was a perfect supply chain storm. Not only has Covid disrupted production, but fiscal stimulus has boosted demand and the Suez Canal closure has caused months of disruption,” said Guy Foster, chief strategist at asset manager Brewin Dolphin.
Supply chains may prove more resilient this year as inflation hurts consumer spending power and more companies adapt to Covid-safe production protocols. Additionally, a surplus of orders from the year-end holiday could allow inventories to be replenished while older shipments are coming in, Foster said.
Tensions in the supply chain have contributed to persistently high inflation. New figures on Wednesday showed US consumer prices rose 7 percent annually in December, the fastest pace in nearly 40 years. Separate data on Thursday showed that US wholesale prices rose 9.7 percent annually last month, although that was slightly below economists’ forecasts.
While macroeconomists are generally optimistic about the year ahead, most indicators of supply chain stress remain much higher than pre-coronavirus levels. Container shipping rates peaked in October but are still more than five times January 2020 levels, according to data provider Harpex.
Richard Flax, chief investment officer at digital asset manager Moneyfarm, expects the supply chain recovery to be “slow” over the course of 12 to 18 months. Improvements related to investments in better security of supply and plant efficiency would take time, he added.
Timothy Fiore, Chair of the Institute for Supply Management, noted “indications of improvement” in labor resources and supplier delivery performance. But customer inventories remain very low, while backorders “remain at very high levels,” he added.
“The fly in the ointment is China,” said Foster, who sees “a big risk” for 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.