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, IguaƧu 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.