Vijay Kumar Gaba

Presently, the global markets are looking jittery as the magnitude of the crises and their impact is not assessable. Besides, there is no visibility of a cohesive global plan to manage these crises, as was the case with Global Financial Crisis in 2008-09; even though these apparently regional crises have definite global repercussions. Next few months are very critical in my view. Lack of a united response could push the global economy deeper into a Stagflationary mess that can push the economic recovery process 3-4years down the lane.

“The crisis of today is the joke of tomorrow” — H. G. Wells (English Author, 1866-1946)

As of this morning, a number of regional economies appear struggling with some sort of crisis. The factors causing these crises are varied; and in many cases even trivial. Collectively, these regional crises appear to be clouding the global economic recovery; and threatening a protracted phase of stagflation (negative or very poor real growth).

In particular, the sharp rise in global energy prices is a matter of serious concern for all. The prices of natural gas and coal are now at decade high. Crude oil prices are also at 5yr high and forecasted to move further in view of expected harsh winter. Consequently, the electricity prices and transportation (shipping and freight) costs have also risen sharply. The sharp inflation in energy prices is becoming a global crisis and being seen as a major threat to the global economy recovery.

From a plain reading of the events across the globe, inter alia, the following factors appear to be catalysing some sort of crisis, impacting the global economic recovery from the Covid-19 pandemic.

1.    Supply chain disruptions caused by labour displacement due to the pandemic; underinvestment in capacity building in past one year; uneven recovery across sectors and geographies; etc.

2.    High tide of pandemic stimulus ebbing.

3.    Erratic weather patterns across the world adversely impacting the crops.

4.    Hard geopolitical and trade related positioning between groups led by China and the USA.

5.    Precipitous shift in the business models towards ESG and digital, leading to significant change in demand and supply patterns for carbon and decarbonized products; material shift towards renewable energy and electric mobility, etc.

6.    Rising fragility of global financial system, with burgeoning debt both at the sovereign as well as household levels.

7.    Hardening nationalist positioning constricting free movement of labour and capital (e.g., Brexit).

The following are some of the instances that reflect the changing business conditions, demand supply patterns and the crises emanating from these.

US – Business consolidation and uncertainties hurting the supply chain

"Sorry. No French Fries with any order. We have no potatoes", a board at the Burger King in Florida read this week.

The shortage of trucks and driver is choking the supply chain across US. As per the industry sources, “Truck drivers that would transport cargo on flatbed trucks are being recruited away by Walmart and Amazon to exclusively pull box trailers or shipping containers. Large items like steel piles and premade concrete pieces either can't fit or can't be loaded into containers or box trailers. Vendors tell me demand is as high as 40:1, meaning for every available flatbed truck there are up to 40 waiting customers. The roads around the NYC metro area are as clogged with truck traffic as ever, but we're facing longer waits and higher prices to haul non-containerized cargo.”

One of the largest shipping ports in USA (San Pedro, LA) reported that some 60 container cargo ships idling at the entrance of the port complex last week. With an increase of 30.3% in cargo volume as compared to the same period in 2020, the congestion at ports is showing no signs of easing.

As per WSJ reports - The armada of cargo ships is due to surging volumes and unpredictability in global supply chains caused by the Covid-19 pandemic, and exacerbated by shippers pulling holiday-season imports forward to avoid delays later. The congestion at ports is one of a number of global bottlenecks as ports juggle strong consumer demand and shortages of workers and equipment caused by pandemic-related health and safety measures. These challenges have been  leading to significant delays and additional logistics costs.

UK gasoline crisis – Brexit may have a role to play

As the country heads into what could be a harsh winter, the US energy prices are soaring. In past nine months, the prices of natural gas in UK have risen over 250%. Though multiple factors could be attributed to the precipitous rise in energy prices and consequent second round inflation, logistic issues are cited as one of the principle reasons.

The complexity of the situation forced Paul Scully, the U.K.'s minister for small businesses to comment, “We know this is going to be a challenge and that's why we don't underestimate the situation that we all find ourselves in.”

The government officials and the prime minister himself have maintained that there is no shortage of the fuel in the country. It is the shortage of the drivers that is causing supply chain disruptions for fuel and food. The government is even contemplating to call the army to help bridging the supply chain gaps.

While there is no official word on labour shortages, it is estimated that labour supply may have got choked due to Brexit; travel restrictions due to Covid19; and less number of labour participating due to Covid19. The chief economist of KPMG speaking to media estimated that labour shortages may take 6 more months to fully resolve.

Andrew Goodwin, chief U.K. economist at Oxford Economics, told CNBC – “Households have got this big stockpile of savings to spend, but that will be starting to ebb away a bit simply because the bad news we're having on things like inflation. I suspect, we're going to end up in a situation where the reality is a little bit disappointing to what we were expecting say three months ago. And that's simply because of these issues with supply shortages, both in terms of sort of constraining output and also just eating into consumers' purchasing power."

Though the US economy is expected to reach pre Covid level by 3Q2021, demand pull is not something that is being cited frequently as one of the primary reasons for inflation spike. It is mostly the supply chain disruption.

Another popular view is that “It’s outrageous to suggest the current UK energy situation is the result of a rapid transition away from fossil fuels. It is primarily a gas crisis, fuelled by the nation’s slow transition to lower carbon sources. The origins of the crisis are complex, and date back many years.”

“Gas prices in Europe are at record highs, but the European Union’s internal energy market – of which the UK is no longer part – allows member states to trade with each other in a way that balances prices out.

This means EU countries can’t always take full advantage of very low energy prices, but at the same time means they’re protected from very high prices.

The UK, as an independent country outside the internal EU market, can take better advantage of low energy prices. But at times like these, when energy prices are very high, it left highly exposed to price shocks.” (Prof Aimee Ambrose, Sheffield Hallam University)

China’s decarbonization plan – Beijing Winter Olympics in play?

In the last week of September, the production line of a solder company in Kunshan was silent. In previous years, the factory was busy, stocking up for the National Day holiday. However, due to strict local power restrictions, they have temporarily had to suspended production. “All companies are going to stop production,” one manager explained, “When the policy first came out, it was thought that it wouldn’t affect processing companies. But since September 27, it requires all companies to stop production.”

Steel, non-ferrous metals, chemicals, textiles, and other energy-consuming industries are all affected. Unlike the previous round of flexible measures, which aimed to reduce energy consumption by 10%-30%, the current power control policy is more stringent. Now, local authorities are implementing an “open 2, stop 5” measure; companies will only be allowed to operate for two days a week. Most will have to reduce their production by 90% or shut down completely.

China aims to keep power consumption under control with carbon neutrality targets in mind. In August, the central government issued the “Barometer of 2021 Half-Year Regional Energy Consumption Intensity & Total Amount” – also known as the energy consumption “double control” plan. Under this plan, provinces must manage “total energy consumption” as well as “energy use intensity” while meeting their five-year targets.  (International Tin Association)

Some observers suspect that this plan is primarily aimed at ensuring blue skies during winter Olympics in Beijing; while other believe that it is part of the long term plan to decarbonize the Chinese economy.

The impact of “double action plan” is that Global consumers are already facing shortages of smartphones and other goods ahead of Christmas. The Global Times reported that “Multiple semiconductor suppliers for Tesla, Apple and Intel including ESON, Unimicron and ASE groups, which have manufactured plants in the Chinese mainland, recently announced they will suspend their factories’ operations to follow local electricity use policies.”

Brazil agriculture – snow and drought cause havoc

Brazil faced an unusual cold weather with froth killing the crop, followed by one of the severest drought in many decades. Brazil is also one of the worst affected countries due to Covid-19 pandemic in terms of the fatalities.

The New York Times reported, “Crops have shriveled up under searing heat. Immense water reservoirs, which generate the bulk of Brazil’s electricity, are growing alarmingly shallow. And the world’s largest waterfall system, Iguaçu Falls, has been reduced from a torrent to a trickle.”

Several states in the country are facing the worst drought in at least 90 years. The crisis has led to higher electricity prices, the threat of water rationing and a disruption of crop growing cycles. Agriculture, an economic engine of the nation — which relies heavily on hydropower — is now at risk.

Experts said the arid landscape, which coincided with a rise in illegal deforestation over the past months in the Amazon rainforest, could lead to a devastating fire season. Enforcement of environmental regulations is weak in the rainforest, and fire season traditionally begins in July.”

Before the worst drought in a century, Brazilians were surprised by unusual snow fall in July. At least 40 cities in the Rio Grande do Sul reported thick ice, while 33 others witnessed heavy snowfall reaching up to a meter high in some places, according to several reports. For most of the Brazilian population it was their first snow experience. The snow materially damaged sugar, citrus, and coffee farms.

“We’re left with a perfect storm,” said Liana Anderson, a biologist who studies fire management at Brazil’s National Center for Monitoring and Early Warning of Natural Disasters. “The scenario we’re in will make it very hard to keep fires under control.”

Brazil, is the world’s biggest exporter of coffee, sugar and orange juice. Poor Brazilian crop means that the global coffee and sugar prices have shot up sharply.

Conclusion

These are only some of the instances of regional crisis that are having global impact. The prices of food and energy are rising across countries. The productions lines are working at sub optimal capacities due to input shortages. The policy makers are hoping that these crises are all transitory and would ease in next few months (mostly on their own) as the pandemic related curbs are eased and bottlenecks are removed. However, in the interim severe damage could be caused to many small and medium sized business and households.

Presently, the global markets are looking jittery as the magnitude of the crises and their impact is not assessable. Besides, there is no visibility of a cohesive global plan to manage these crises, as was the case with Global Financial Crisis in 2008-09; even though these apparently regional crises have definite global repercussions. Next few months are very critical in my view. Lack of a united response could push the global economy deeper into a Stagflationary mess that can push the economic recovery process 3-4years down the lane.