Robin Marshall
Alex Nae
- Fears of another global supply chain shock have been prompted by Red Sea shipping disruption, and increased geo-political tension in the Middle East.
- But supply chain pressures have increased only modestly, to date, with pressure indices mean-reverting to pre-Covid levels.
- Indeed, the easing of supply-chain pressures in tradeable goods in 2023 has driven sharp declines in goods inflation, suggesting supply-chains are more resilient than assumed post-Covid.
After the perfect storm for global supply-chain pressures in 2021-22…
It is well known that disruption to global supply chains had a major bearing on both global growth and inflation when the Covid pandemic emerged in 2020. This was made worse by Russia’s invasion of Ukraine in 2022, constriction in the supply of natural gas from Russia, EU sanctions on Russian oil, and Ukraine’s disappearance as a major grain exporter since February 2022.
Alongside these global supply shocks, Covid windfalls spurred consumption of tradeable goods, as service sectors shut down, straining the global freight system as ships laden with goods at ports could not unload for weeks at a time. As a result, warehouse stocks collapsed, and stocks of natural resources, food and energy fell to 10-year lows. Covid rules played a part in this as well, where factories, ports and production facilities were restricted on the workers in their shifts. Lastly, commodity stocks were allowed to run low during the early stages of the pandemic as Lockdowns squeezed global demand, and oil and commodity prices fell sharply, and G7 governments focussed instead on fiscal support, like furlough schemes. (In contrast, China prioritised food and energy security during late 2021.) With supply-chains fractured in many regions, the Suez Canal grew in importance.
…a complete reversal in 2022-23, and recent uptick starts from depressed levels
This perfect storm for global supply-chain pressures drove the NY Fed’s global supply-chain pressure index (GSCPI) some 4.3 standard deviations above its historical mean in 2021-22, as Chart 1 shows. However, this reversed, in 2022-23, as the GSCPI fell some 1.6 standard deviations below its historical mean, in mid-2023. Since then, there has been some upward pressure on global supply chains in 2023-24, but the GSCPI is still below its historical mean– indicating some spare shipping capacity despite the bottleneck in the Red Sea. Low demand for goods is also confirmed by a short-lived rise in Baltic Dry Index prices. This index is a measure of dry cargo shipping cost and is closely correlated to the GSCPI, with the correlation rising to near 0.7 during times of increased pressure on global supply chains.
Chart 1 Global Supply Chain index
Source : New York Federal Reserve, February 2024. Past performance is no guarantee of future results. Please see the disclaimer for important legal disclosures.
Global slowdown, higher food & energy stocks all eased supply-chain pressure
There are other reasons for the relative stability in supply-chains for tradeable goods. Firstly, the switch in consumer demand away from tradeable goods and back to services, as service sectors re-opened post-Covid lockdowns. Secondly, as central banks raised interest rates sharply in 2022-23, the global economic and consumer spending slowdown reduced demand for tradeable goods and eased supply-chain pressures. Thirdly, after dropping sharply in 2021-22, world grain stocks increased slowly in 2023, and fourthly, in the energy sector, European gas reserves were re-built in 2022-23, as Chart 2 shows.
Chart 2 Food and energy stocks
Source: USDA & Refinitiv/Worskpace. Past performance is no guarantee of future results. Please see the disclaimer for important legal disclosures.
Fifthly, in the oil market, there has been a sharp expansion in US crude oil production, to reach over 13mb/d in recent months – compared with less than 10mb/d in the early stages of Covid. Indeed, increases in non-OPEC production largely offset the cuts to production throughout 2023 from OPEC+. Finally, the Dollar index remains near its higher levels at around 104 points, making it hard for countries to significantly increase imports of goods or commodities.
Chart 3: US and OPEC+ production from 2019 to 2024
Source: EIA Global Cruse Production and Capacity, Refinitiv Workspace. Past performance is no guarantee of future results. Please see the disclaimer for important legal disclosures.
And easing in supply-chain pressures has helped drive much lower goods inflation
Evidence of the easing in supply-chain costs is found in the collapse in US goods inflation, relative to services and overall inflation, as Chart 4 shows.The profile of US goods inflation also maps quite closely to the global supply chain pressure index in Chart 1 and shows the sharp decline in goods sector inflation in 2022-23 dragging overall inflation lower from mid-2022 onwards.
Chart 4: US PCE goods inflation v aggregate inflation y/y %
Source: Federal Reserve Bank of St Louis, February 2024. Past performance is no guarantee of future results. Please see the disclaimer for important legal disclosures.
In conclusion, not all supply-chain shocks are born equal…
It is still quite feasible the failure of supply-chain indices, and the BDI, to show more major impact from disruption to Red Sea shipping is a matter of timing, but the weaker global economy, higher food and energy stocks suggest otherwise. Indeed, although there is some evidence to date of an increase in shipping costs and broader supply-chain pressure emerging, this is from deeply depressed levels in 2023. It also suggests the Covid supply-chain shock was a perfect storm, with the combination of surging demand for goods, low stocks and enforced shutdowns.
…and reports of the death of global supply-chains may be exaggerated?
Although not definitive, the correlation of supply-chain pressure and G7 inflation rates supports the view that the 2021-22 inflation shock was supply-side driven, and not a demand-pull inflation (leaving aside the criticism central banks faced for leaving substantial monetary stimulus in the system too long). Finally, despite widespread fears of a major reversal in globalisation and geo-economic fragmentation, after the supply-chain shut-downs post-Covid, recent experience suggests these fears may be exaggerated, since world trade rebounded quickly in 2022-23, and supply-chain indices show normalisation.
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