After a tortured year for exports constraints, global supply chains continue to being battered by a fresh surge in Covid-19 infections. However, the supply-demand imbalance should ease as spending on services outpaces demand for consumer goods in developed markets and Asian production recovered better than other regions, says Carol Liao, China Economist at PIMCO in this guest commentary.
Global demand for consumer goods has rebounded since the second half of 2020, driven initially by large government stimulus packages and, more recently, by resilient capital expenditures and swift vaccination rollouts in most developed markets. But supply constraints remain.
Some large emerging market manufacturing countries continue to struggle to contain the virus, while sectors such as semiconductors continue to face capacity shortages due to surging demand for automobiles and electronics. Logistical bottlenecks, caused by disruptions to ports, shipping lines, and domestic transportation, have lengthened delivery times and further weighed on the supply shortage in some regions. As a result, inventories quickly run out and inflation has spiked in the US and other markets.
However, we expect the global supply chain bottlenecks to ease towards year-end, as production increases, shipping congestion clears, developed market demand for goods declines, and consumers in advanced economies shift spending to services (assuming no further disruptions from the pandemic).
A differentiated supply picture
Overall, Asian production has recovered better than other regions. In East Asia, where the pandemic has been relatively well-contained and most factories have remained open, industrial production has picked up quickly since the second half of 2020. China’s industrial production had already rebounded and exceeded pre-pandemic levels by last June and has remained solid since then, supported by strong exports and domestic investment. While global Purchasing Managers’ Index data in May generally showed lengthier delivery times compared with 1Q, Asian economies have fared better.
Semiconductor chip shortages remain a major supply bottleneck for global manufacturing. The recent coronavirus outbreak in Taiwan could prolong the shortage, although the impact so far has been largely on domestic consumption and consumer sentiment rather than industrial activity. While foundry production is mostly automated and not particularly labor-intensive, the pandemic is affecting other parts of the tech supply chain, such as logistics. We continue to expect the chip bottleneck to ease gradually in the second half of 2021, particularly for car companies, yet semiconductor supply will likely remain tight.
Logistical bottlenecks exacerbate supply-demand imbalance
Congestion has increased in South China ports due to tighter pandemic controls in response to the coronavirus outbreak that started in late May. Shenzhen’s Yantian port, third-largest in China, resumed normal operations only at the end of June after having operated below 50% of normal capacity on average for the month. The port accounted for about 6% of China’s foreign container shipments in 2020 so the disruptions could dent June exports in China, particularly cargo destined for Europe and the US. Now that Yantian has resumed normal operations, we expect exports to rebound, which could further exacerbate port congestion in Europe and the US in the coming weeks.
Port congestion and strong demand have caused freight rates to soar in recent months and we believe spot rates remain well supported, with an expected strong season ahead in 3Q 2021. While shipping costs generally constitute a tiny portion of the price of final goods, logistical bottlenecks could exacerbate the imbalance between demand and supply and lead to further inflation pressures in destination markets.
Global supply chains to ease by 2021 end
Overall, we expect the supply-demand imbalance to ease toward the end of the year after demand for consumer goods peaks in developed markets and service-sector spending – which is less import-intensive – increases (assuming no further disruptions from the pandemic). In addition, production is likely to catch up and adjust to the demand recovery, while logistical bottlenecks should clear in 2022 as capacity ramps up and freight costs should gradually normalize by next year.
Inflation has scope to be elevated in the months ahead and to stay bumpy given some of these bottlenecks and disruptions. However, with production resuming and growth moderating into 2022, we expect inflation in developed markets will peak in the coming months and moderate in the second half of 2021.
With strong developed market demand recovery, global supply chain bottlenecks have pushed up commodity prices, benefiting commodity exporters. While the chip shortage and logistical congestion have contributed to a spike in the US inflation, the Fed still views inflation as transitory and will likely take a patient approach, compared with potentially faster policy tightening elsewhere.
Commodity producers, shipping companies, semiconductor suppliers, and secondhand auto sellers are benefiting from the global supply chain bottlenecks as the prices they charge soar. However, the profit margins of some downstream manufacturers will likely suffer.
Global pandemic control and vaccination progress remain key variables. Any deterioration in progress could distort the global supply chains and demand balance, either through supply chain disruptions or further shipping bottlenecks, resulting in delayed growth recovery or prolonged inflation pressures.
Carol Liao is a senior vice president and China economist based in the Hong Kong office. Prior to joining PIMCO in 2020, she was the senior China economist at J.P. Morgan for three years. Previously, she served as the China economist at the International Monetary Fund from 2013–2016.