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A holistic approach to global bottlenecks

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A holistic approach to global bottlenecks

Many observers have noted that bottlenecks along global supply chains will slow the economic recovery and put pressure on consumer prices. In this Macro Flash Note, GianLuigi Mandruzzato assesses the severity of bottlenecks, the scarcity of production factors and final goods, and the consequent inflationary pressures.

GianLuigi Mandruzzato
GianLuigi Mandruzzato

The slowdown in the economy and the sharp rise in inflation in many developed countries signal the presence of bottlenecks along global production chains. When supply does not meet demand, the prices of goods and services along the entire production chain tend to rise. Monitoring production bottlenecks is helpful in assessing future economic outcomes.

However, supply not meeting demand can result from either demand side or supply side shocks. In the first case, an increase in supply but to a lesser degree than a rise in demand, generates upward pressures on prices: this situation is typical of cyclical recoveries. In the second case, the upward pressure on prices mainly reflects lower levels of activity and employment despite rising demand.1

In the absence of a single statistic that defines the nature and measures the intensity of bottlenecks, it is sensible to consider a range of indicators from different sectors and geographic areas.

The delays in seaborne trade may be evidence of supply chain bottlenecks (see Charts 1a and 1b). Much of the intercontinental trade occurs by sea. Since consumer demand for goods has recently surged, the outcome has been much longer queues of vessels at main international ports than one would have expected in an ordinary business cycle recovery.

 

Chart 1a. Days of delay at Chinese ports

Chart1a.jpg

Source: Refinitiv, the Port of Los Angeles, and EFGAM calculations.

Chart 1b. Vessels at LA port and days of stay

Chart1b.jpg

Source: Refinitiv, the Port of Los Angeles, and EFGAM calculations.

The driving factors appear to have been the precautions taken to combat the pandemic, which exacerbated the shortage of skilled workers and slowed operations at ports (see Chart 2a). As a result, since the pandemic the traffic of commercial vessels remains weak and the loss of efficiency of port operations means a lower percentage of containers are fully loaded (see Chart 2b).

 

Chart 2a. Container traffic and trade bottlenecks

Chart2a.jpg

Refinitiv, IFO, RWI/ISL, the Port of Long Beach, and EFGAM calculations.

Chart 2b. Seaborne trade indicators

Chart2b.jpg

Refinitiv, IFO, RWI/ISL, the Port of Long Beach, and EFGAM calculations.

The limitations on the production capacity of the maritime sector have led the volume of traded goods to fall below trend, putting upward pressure on the cost of sea freight and creating a scarcity of goods, including commodities such as industrial metals that are an input in most industrial processes (see Chart 3a).

Chart 3a. Freight costs and industrial metal stocks

Chart3a.jpg

Source: Refinitiv, LME, European Commission, and EFGAM calculations.

Chart 3b. Chips shortage and auto sector bottlenecks

Chart3b.jpg

Source: Refinitiv, LME, European Commission, and EFGAM calculations.

As a result, the delivery times of goods have lengthened, particularly in the US and Europe (see Charts 4a and 4b). In Asia, delays in Taiwan stand out and have had international repercussions because the country is specialised in the production of semiconductors. For months, US and EU manufacturers, including automakers, have been complaining that the lack of chips has slowed production and the resulting shortage of finished goods limits sales despite strong demand (see Chart 3b). It is therefore encouraging that delivery times in Taiwan are tentatively normalising and that backlogs of electronic products have decreased.

 

Chart 4a. US ISM commitment lead time (days) 

Chart4a.jpg

Source: Refinitiv, ISM and IHS Markit.

Chart 4b. PMI/ISM manufacturing delivery times

Chart4b.jpg

Source: Refinitiv, ISM and IHS Markit.

Finally, labour shortages exacerbate supply chain bottlenecks. Developed market companies report a growing difficulty of finding skilled workers, which slows the recovery of employment despite plenty of job openings (see Chart 5a). The shortage of skilled workers is felt above all in labour-intensive sectors, including in services and construction. In the US, delays in home completion have risen abruptly and the stock of homes for sale is at an all-time low (see Chart 5b). With strong demand for residential property, house prices have risen sharply, pushing overall inflation higher. 

 

Chart 5a. US SMEs worker shortage

Chart5a.jpg

Source: Refinitiv, NFIB and EFGAM calculations.

Chart 5b. US housing market

Chart5b.jpg

Source: Refinitiv, NFIB and EFGAM calculations.

Conclusions

The monitoring of a wide range of indicators from different geographical areas and economic sectors helps in assessing the severity and evolution of global supply chain bottlenecks and the resulting shortages of goods available to end users, including manufacturers and consumers.

Supply chain bottlenecks have slowed the global economic recovery while increasing inflation. It is thus encouraging that the outlook for the semiconductor sector seems to be improving, supported by recent statements from the President of Volkswagen Diess2 and that the price of sea freight rates has fallen in past weeks after having risen almost tenfold since the spring of 2020.

1 Other symptoms of supply side issues constraining production are pronounced and persistent deviations of economic indicators from their typical cyclical pattern.
2 See http://go.pardot.com/e/931253/ys-my-mood-is-good-2021-11-30-/9tjl/15773337?h=h_iNEIAeLSJTcRHgsRmevwZxd5CAM3h65XAC7Kl6fFE

 

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