4 minute read
As the global economy has reopened, demand has clearly outpaced the supply of nearly everything from skills and labour to energy and commodities, and big questions remain over the scale and persistence of the disruption in the year ahead. We take a closer look at how long they’re likely to last and the major implications for key sectors, markets, and regions.
Many sectors globally have been hit by labour shortages over the past few months, problems that have been particularly acute in the US and the UK.
In the US, despite vaccination progress and economic reopening, many would-be workers remain on the side-lines for any number of reasons: ongoing health concerns linked to coronavirus infection; people awaiting retirement; workers focusing on other priorities; and mothers remaining at home to care for children (possibly reflecting a lack of childcare). In fact, one of the biggest factors holding back labour supply is the relatively low participation of women in the US job market. The pandemic has resulted in many women assuming the role of primary caregiver in their households. After the Great Recession, for example, it took a very tight labour market to attract this group of women to re-join the labour force, which leads us to believe their return to work following the pandemic will be slow.
Number of US women who do not want a salaried job and instead maintain families on a full-time basis
The UK is subject to the same supply pressures as other advanced economies, but Brexit adds a layer of complexity. Although we still expect most of the effects of Brexit – weaker investment expenditure, trade frictions and reduced labour market flexibility – to be felt over the medium term, some of the consequences of leaving the European Union are already apparent, and reduced labour supply is among the most obvious. There’s little doubt that net migration into the UK has fallen sharply in 2021 and, in all likelihood, many EU citizens who left the UK in the immediate aftermath of Brexit or during the pandemic are unlikely to return. There’s a clear sense that the UK labour market will not be as fluid as prior to Brexit and the pandemic from now on.
The rise in demand – partly the result of aggressive fiscal stimulus during the pandemic – since economies reopened has far outstripped supply. Resource-exporting countries in Latin America, the Middle East and Africa have experienced a slow recovery. This has led to shortages of raw materials such as precious and industrial metals, coal, and oil & gas, caused acute supply chain disruptions, and pushed prices higher.
As economies continue to reopen and vaccination rates pick up around the world, we expect exports of commodities and raw materials to pick up too. That said, increased production of key raw materials may continue to lag surging demand, which means upside pressure on prices could persist throughout 2022. For example, crude oil inventories are already quite low and they’re likely to remain below pre-pandemic averages over the course of next year. Energy supplies are also subject to a range of geopolitical drivers, including the role of fossil fuels amid the need to cut carbon emissions, and supply management by the OPEC+ group.
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A dearth of semiconductors has been among the most noticeable shortages we’ve seen recently, and it may have an outsized impact on the growth rates of many economies. That’s because semiconductors are vital in a range of sectors, and shortages are having a profound impact on the ability of auto, smartphone, and computer manufacturers to meet demand (often to the detriment of sales).
The semiconductor industry is cyclical in nature, and the current upswing in the sales cycle has been amplified by the switch to the pandemic-induced work from home model, which has led to higher demand for electronic devices and increased adoption of smart home appliances. This increased demand looks to be here to stay as many working arrangements have shifted permanently.
Unfortunately, the explosion in demand for semiconductors has not been met by a timely increase in production capacity, resulting in supply bottlenecks for chips. Given that production capacity is slow to come online – it takes 1–2 years to redesign new production plants to meet rising demand), we expect the chip shortage to persist well into early 2023.
Developed markets saw an early pick-up in demand after the initial shock of the pandemic due to the huge fiscal support that was provided to their consumers. By contrast, many emerging markets experienced a faster recovery in production as their governments chose to prioritise the reopening of factories. But this has clearly resulted in increased demand for the shipping and logistics needed for goods to flow from emerging markets to more developed countries.
Congestion at ports, coupled with a mismatch between the supply and demand of containers, has led to soaring shipping costs. By the end of September, global sea freight rates for container shipping were almost ten times higher than in January 2020. Container prices represent a useful proxy for the price fluctuations of imported goods and reflect the impact of logistical shortages in the supply chain. However, whether these cost increases will make their way into prices of final goods largely depends on the pricing power of companies. While the discrepancy between supply and demand for containers will eventually normalise, it looks likely to persist until well into 2022.
For most regions, global shipping times remain elevated – and will for some time
In addition to higher prices, limited capacity is resulting in slower delivery times around the world, although the problem has been particularly pronounced in developed markets. The most recent set of manufacturing PMI data suggests that this situation is unlikely to ease as we approach the holiday season. In fact, it looks set to last at least through the first quarter of next year – if not longer.
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It goes without saying that the bottlenecks above are going to have inflationary effects, but their impact will vary by region and sector. Those that experienced faster recoveries in demand, such as the US, have generally witnessed higher consumer inflationary pressure, while those where the domestic demand recovery has lagged, such as China, are still registering relatively subdued price rises. Manufacturing hubs that mainly import raw materials have seen a more rapid surge in producer price index inflation.
But will these effects be temporary? We believe the risk is skewed towards more persistent inflationary pressures, for the developed world at least. Raw material shortages and logistics bottlenecks may ease in 2022, when demand normalises and more countries reopen. Weather-related disruption to energy supplies should also ease sooner rather than later.
However, increasing semiconductor production and shipping capacity to accommodate structurally higher demand may take 1–2 years. The realignment of manufacturing supply chains and labour shortages may last even longer. These supply shortages may feed into higher prices for a wider range of goods and services, pushing up core inflation in the medium term.
Over the longer run, a shift in manufacturers’ strategies to enhance supply chain resilience by building “just in case” rather than “just in time” supply chains may lead to structurally higher production costs and inflation, although this should be a gradual process. What’s more, geopolitical changes that began prior to the pandemic, including Brexit and US-China trade tensions, might also be drivers of inflation over the long term.