How the politics of China-centred supply chains is weighing on global economic recovery
- Prices are rising as stimulus-fuelled consumer demand runs up against supply chain constraints
- While inflation sceptics expect the problem to go away as supply systems reopen, there are signs that all is not well on the global factory floor
The risk of inflation is more broad-based than many people seem to realise and, once this realisation sets in, there is a danger of an already-tentative global economic recovery unravelling. As has been the case with many past market crashes and economic recessions, complacency comes before a fall.
Working from home may have revolutionised certain aspects of human activity – notably in service industries – but it is difficult to do metal machining, lathe turning or foundry casting in your living room.
Manufacturing supply chains were thus heavily interrupted as lockdowns proliferated during the repeated peaks of the Covid-19 pandemic, especially in the emerging economies that form a crucial part of the global supply network nowadays.
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But now supply systems are reopening, albeit slowly in places, all will be well, some suppose. There will be delays and shortages for a while, causing prices to rise as growing consumer demand runs up against supply constraints. But this will sort itself out.
Again, the question is, will it? It is hard to give definitive answers yet because of the complexity of supply chains, and much research is being devoted to a previously understudied subject. But there are signs that all is not well on the global factory floor.
As the Institute of International Finance (IIF) in Washington observed recently, “the world has never seen the kind of global supply disruptions we are seeing now, which means that there may be more pass-through into core inflation than historical mappings capture”.
The IIF study revealed that “more and more countries are seeing companies mark up prices … due to long delivery times and the rising cost of inputs into production”. It concluded that “mark-ups are increasingly global and likely to persist into 2022, as the global economy progressively reopens”.
This would carry over inflation at least into next year although, all things being equal, that still suggests a transitory phenomenon. But, if we step back from production and delivery logistics and view what is happening from a geopolitical perspective, such sanguine outcomes look less likely.
These links are not broken yet, although strain on them is growing as manufacturing nations in these value chains are forced to rethink their role as suppliers to the competing superpowers, the US and China.
All this is a legacy of interest rates and inflation rates that have languished at low levels for a number of years. It does not require a degree in economics to see how vulnerable to correction this house of cards is.
Central banks are faced with an awful dilemma. If cost-push factors continue to put upward pressure on prices, they must respond. Hence recent indications that the US Federal Reserve will probably need to start hiking rates sooner rather than later in the light of probably persistent inflation.
That may still seem a distant threat but the whole edifice of stock prices and debt levels could come toppling down now that markets are smelling blood, threatening the nascent global economic recovery and triggering a long-predicted financial market crisis.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
