Global supply lines brace for widening economic storm

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Global supply tensions that began to ease in early 2022 are worsening again as headwinds strengthen from war in Ukraine and COVID lockdowns in China, threatening slower growth and faster inflation in the global economy.

After the pandemic hit trade routes between Asia and the United States the hardest in the past two years, the latest turmoil is being felt sorely in Germany, which relies heavily on Russian energy and suppliers to across Eastern Europe. Business expectations in the region’s biggest economy in March saw the biggest one-month drop on record, factories across the continent are facing shortages of diesel and parts, and transport delays of goods via major North Sea gateways such as Bremerhaven are getting longer.

“We thought Russia was just a resource story that was going to drive up energy prices – that it would make supply chains more expensive but it wouldn’t disrupt them,” said economist Vincent Stamer. Commerce at the Kiel German Institute for the World Economy. . “It looks a bit more threatening than we originally anticipated.”

In addition to wartime setbacks, omicron outbreaks expand China’s use of strict lockdowns in major shopping malls, the latest in Shanghai. AP Moller-Maersk A/S, the world’s No. 2 container ship, said on March 28 that some depots serving local ports have closed indefinitely, and trucking to and from the terminals will be “severely affected.”

Chinese exports had already been falling from an October peak — a trend that could continue over the next few months if Beijing maintains a hard line in the fight against the virus, Stamer said. This will add shipping delays, supply issues and costs for businesses from the US to Europe.

According to the supply constraints indices developed by Bloomberg Economics, pressures in the United States and Europe intensified in February after several months of improvement. Anecdotal evidence through March suggests tensions will not diminish.

Stamer cited the example of electrical wire assemblies made in Ukraine for German automakers. “These cable trees are actually custom-made for individual cars” and don’t come easily or cheaply from other countries, he said. Another rare input that is suddenly even rarer is the neon gas used in the production of semiconductors. Ukraine produces 50% of the world’s purified neon, Stamer said. Russian commodity production extends even deeper into the global economy.

More than 2,100 American companies and 1,200 in Europe have at least one direct supplier in Russia, and the total rises to 300,000 when indirect suppliers are included, according to Interos, based in Arlington, Va., a risk management firm of the supply chain.

“Many industries depend on the same raw materials and a large percentage of them come from Russia,” said Interos CEO Jennifer Bisceglie. “You are seeing a massive cascading effect on an already lame global supply chain system.”

The economic and political stakes far outweigh the developed world’s biggest worry in 2021 – the fear that slammed global logistics will ruin Christmas for retailers and consumers.

Fears about food shortages are growing. The cost of living is rising in both rich and poor regions. Soaring energy prices spark street protests from Albania to UK

Costly, longer-term shifts are also accelerating: Goldman Sachs economists say new geopolitical risks are forcing companies to bolster their operations against global disruptions through relocation, diversification and overstocking.

“At the moment, the storm clouds on the horizon look quite threatening,” Citigroup global chief economist Nathan Sheets said in a March 25 research note, explaining why “a shock of “Major negative supply” due to the Russian-Ukrainian conflict led the bank to cut its outlook for global GDP growth this year and raise its inflation projections. “Ultimately, an already complicated picture became even more complex.”

Commerce is already feeling the sting of Moscow sanctions and blocked transportation routes. According to FourKites Inc., a supply chain visibility platform, Russian imports in all modes of freight transport fell 62% in the first month of the conflict, while shipments to Ukraine fell by 97%.

Although Russia accounts for 5% of global maritime trade and Ukraine only 1%, an increased risk of a global economic downturn has emerged.

Barclays economists said on March 28 that the world was entering a new era of heightened volatility for growth and inflation. On March 25, Allianz Research warned of an increased risk of a “double whammy” in global trade – lower volumes and higher prices – in 2022. Clarksons Research, a shipping analytics firm in London, said last week slashed its projections for world trade this year and next, saying its port congestion indices are rising again and the latest shocks are “amplifying an already disrupted shipping system”.

According to data compiled by Bloomberg, the German ports of Hamburg and Bremerhaven have seen new heights of ship congestion this month, while Rotterdam, the continent’s busiest gateway for container traffic, has saw its backup of ships earlier this month hit an 11-month high. .

The grunts make any return to normal unlikely this year unless unexpectedly asking for craters. Shipping, the workhorse of around 80% of global trade, has been stretched so much that the spot rate to send a 40ft container of goods to the United States from Asia averaged over of $10,000 in the second half of last year, or about seven times. higher than the pre-pandemic level. Those rates have fallen in recent weeks, but experts say the reprieve likely reflects a seasonal lull before demand and transportation costs pick up.

“It’s going to get worse in the second half of this year and the peak season,” Mark Manduca, chief investment officer of GXO Logistics, told Bloomberg Television on March 25. the first few weeks of a supply chain shortage – people have inventory.

COVID-19 cases and targeted lockdowns in China are even greater than the risks Russia’s war in Ukraine poses to the fluidity of global supply, according to Euler Hermes economists Ana Boata and Francoise Huang, a unit of the Allianz group. They see a risk of containerized freight prices approaching or even surpassing their previous highs, before returning to current levels by the end of the year.

“Overall, even if they do not return to 2021 highs, cost and congestion levels in global supply chains are expected to remain elevated for most of 2022,” Boata and Huang wrote in an e-mail. -mail. “Normalization can only start more visibly from 2023.”

Trying to anticipate how two years of supply constraints affect consumer prices has already challenged central bankers, with Federal Reserve Chairman Jerome Powell telling a news conference earlier this month that the Russia’s isolation from the global economy “is going to mean more tangled supply chains, so it could actually push back the relief we’ve been expecting.”

Some of that relief was reflected in the New York Fed’s Global Supply Chain Stress Index, a gauge launched in January that has recently shown some easing from late-night peak stresses. Last year. Although it is too early for the New York Fed to quantify the wartime effects, there are signs that the recent improvement in the index will be limited.

“There has been a decrease in pressure, but the level of pressure is still very high. It’s an improvement, but it doesn’t mean the problems are over,” New York Fed economist Gianluca Benigno said of the index’s direction in his latest update in early March. . “Anecdotal evidence suggests there may be more pressure to come.”

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