GLOBAL SUPPLY CHAIN CRISIS:WHAT DOES IT MEAN FOR THE ECONOMY?

-Penned by Shelly Singh

Whether or not children will have their desired toys underneath their Christmas trees is a big question that is troubling Santa this year. As Santa does not find what he is looking for on the empty shelves of the stores, he stomps his feet in agony. He sighs and deeply curses the crisis that has borne another crisis.

Introduction

Global Supply Chain Crisis hit the world as disruptions in the supply chain continued to occur due to the pandemic. As the frequency of shortages and the number of cargos waiting at the ports increase, the economies find themselves stuck in a big crunch. When the pandemic started, the global economy came to a halt. Due to lockdowns and various restrictions imposed by the government, trade suffered. Many manufacturers were forced to suspend their production processes. Demand reduction also forced the output to reduce. However, as the economy started to gain pace again, the businesses continued to produce at a reduced rate, slowing down supply chains and pushing the world into a supply chain crisis.

Implications

Shortages are apparent, as the production cannot catch up with the demand due to its slow pace, which is a result of several bottlenecks present in the supply chain. The time to place a commodity on the shelves keeps on increasing as one manufacturer waits for a supplier to deliver. Most logistics experts say the biggest problems such as soaring shipping costs, delivery delays and occasionally empty shelves will extend through much of 2022. The supply shortages naturally mean a hike in prices, and for consumers, it means preparing for an extended period of higher prices. For central bankers trying to set interest rates, it means inflation tolerances will be tested. The inflation in one of the world’s largest economies is around 5% and can stay around the same level if the crunches in supply don’t ease.
Rising demand will eventually cause shipping rates to increase further. An increase in these rates will force many to increase their capacity until their capacity is over-built. This pushes the cycle into a bust. Looking at the rising demand, retailers and wholesalers will, although some have started panic ordering, worsening the situation. According to economists, over-ordering by retailers will cause a bigger capacity crunch. A bullwhip effect can be underway, as small scale retail level demands will have a larger impact on wholesalers and manufacturers.
Many countries might try to shorten their supply chains by reducing reliance on imports. This might encourage them to build internal capacities. This reduction in interdependence and diminishing integration between certain units around the world is termed deglobalization.
Economists believe that the squeeze may cause stagflation in the economy, like the scenario in the USA in the 1970s. The persistence of high inflation with high unemployment and low economic growth causes stagflation. Such a situation may pose a dilemma for many policymakers as the measures taken to curb inflation may increase unemployment.

The Way Forward

Many experts believe that the disruptions will continue until 2023 despite the efforts to mitigate the issue. A short-term solution to this problem would be to cut back consumer spending and reduce demand. Unfortunately, such a solution is difficult to implement and seems unlikely. A longer-term fix would mean getting Covid-19 under control, building new infrastructure such as more efficient ports, and improving digital transactions and faster communication technology. However, the current crisis is unique to others experienced by the world before and can unsnarl in ways different than some might expect.

References:

● https://www.cnbc.com/2021/10/20/retailers-manufacturers-over-ordering-amid-supply-chain-crisis.html
● https://finance.yahoo.com/news/next-phase-supply-chain-crisis-151922985.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAAhFIUhTZjupFsk0MAHVIDErTIGsmjaFj70aF8bMkG-gcWpDYZA8VrGJrq2JkDWrAJy9KHxEDdF95yY9LXZnU9L87AejOpm7wpdSKevpzQYxQKOg9sM3ADvdR-IWze_NuOhgdE33VMxv-Hfx4NUNM9HaJUFt_lDLRimq1VA4MFOc
● https://www.brookings.edu/research/the-future-of-global-supply-chains-what-are-the-implications-for-international-trade/
● https://www.theguardian.com/business/2021/oct/02/supply-chain-world-economy-energy-labour-transport-covid
● https://www.pharmaceutical-technology.com/comment/supply-chain-crisis-triggers-deglobalisation/
● https://www.bloomberg.com/news/storythreads/2021-10-29/global-supply-chain-collapse-latest-news
● https://www.cnbc.com/2021/10/18/supply-chain-chaos-is-hitting-global-growth-and-could-get-worse.html
● https://www.theguardian.com/business/2021/oct/02/supply-chain-world-economy-energy-labour-transport-covid
● https://www.pharmaceutical-technology.com/comment/supply-chain-crisis-triggers-deglobalisation/
● https://www.bloomberg.com/news/features/2021-11-02/supply-chain-crisis-has-central-banks-facing-stagflation-lite?srnd=storythread-R1RD29T0AFB801
● https://www.businessinsider.in/retail/news/why-the-supply-chain-is-in-crisis-spurring-an-everything-shortage/articleshow/87191578.cms
● https://en.wikipedia.org/wiki/2021_global_supply_chain_crisis
● https://www.cnbc.com/2021/10/20/retailers-manufacturers-over-ordering-amid-supply-chain-crisis.html