Hello, and welcome to Trade Secrets. Remember the global supply chain crisis? What was that all about? Obviously it’s a hostage to fortune to say this, but the snarl-ups in global shipping and logistics that have been exercising us all since late 2020 are easing very rapidly. Ever alert to the dark cloud inside any silver lining, though, I suggest we be careful what we wish for. Charted waters looks at the gloomy outlook ahead of the World Bank and IMF’s annual meetings this week.
Dark days in the economic ecosystem
First, a slight diversion. We shouldn’t really call them “supply chains”. It’s a more accurate reflection of the flexible, multi-stranded nature of the global goods trading system to use the less snappy (hence my not using it in the headline) “supply networks” or the even unsnappier “supply ecosystems”. A chain is useless as soon as its weakest link breaks, but networks and ecosystems find ways to compensate when one branch or node is ruptured. The enormously important context for the logistics crisis is that the extraordinary increase in shipping delays and freight rates since late 2020 didn’t actually stop a pretty healthy recovery in world trade and economic growth after the initial blow of the pandemic.
That pedantic exercise in terminological exactitude out of the way, let’s get on with the show. It’s now clear the crunch is rapidly uncrunching. Freight rates and waiting times at ports are dropping rapidly. The US logistics managers’ index shows spare transportation capacity shooting up and prices falling. The New York Fed measure of global supply chain pressure, which weights together delivery times, backlogs and inventories, is back down to levels last seen at the end of 2020.
Inflation remains high, but the Institute of International Finance, whose chart of delivery times and costs is below, calculates that it’s now driven by the energy shock from the Ukraine war rather than the cost of supply disruption.
As supply ecosystems malfunctioned last year, explanations fell into two basic camps. I was in Team Transitory Demand Effect, which argued it reflected mainly the huge resurgence of consumption and particularly consumer durables (e-bikes rather than food delivery) after lockdowns lifted, putting pressure particularly on the inefficient ports on the US West Coast. The other gang was Team Deep-Seated Supply Problems, who were all about the crisis in globalisation and geopolitics and fragile supply networks and underpriced risks of offshoring and what have you. A bit of a simplification, but that’s how the sides lined up.
Well, not to declare ultimate victory, but the demand explanation is surely the most likely for what’s changing right now. There’s a lot of gloom about a global recession ahead, which if history is a guide will hit goods trade particularly hard. By contrast the supply side hasn’t notably improved: geopolitics and certainty about the robustness of supply networks isn’t all rainbows and kittens. And I can’t find anyone who thinks the Port of Los Angeles and associated trucking services have suddenly perked up.
Jennifer Bisceglie, chief executive of the supply chain consultancy Interos, says it’s about buying behaviour. “First, consumers don’t need the same hard goods: they’re back to doing travel, they’re back to buying services. The second is there’s so much uncertainty in the economy and there’s inflation. The third is that companies are sitting on inventory and so there isn’t the same throughput.”
As for the idea that the reduction in congestion reflects a sudden increase in capacity or efficiency, Bisceglie says: “If after three years you’re waiting for a big bang change in supply chains based on the pandemic, I think it’s already happened.”
Not all the data points line up. Flexport, the freight forwarding company that monitors these things, points out that relative consumer durables demand is still high.
But those figures are from past months. Forward-looking indicators, especially in container shipping, are looking pretty grim: orders are dropping and the number of “blank sailings”, where carriers cancel trips, is rising. The World Trade Organization is forecasting a big slowdown in trade next year.
Phil Levy, chief economist at Flexport, posits there’s a non-linear relationship: “It’s quite possible you can get some big impacts on supply chain congestion with a relatively small reduction in volumes, the same way that a freeway that’s 90 per cent full might be moving quite well but one that’s 99 per cent full is at gridlock.”
Now, of course I’ve slightly caricatured and given a stark either-or framing of the different explanations, particularly for expository convenience and partly to make myself seem cleverer. Clearly there are some supply-side problems — the Covid-related port and trucking shutdowns in China being one of them — which made the demand-driven congestion and shipping costs worse and which have somewhat been resolved. Changes aren’t the same as levels: if what we’re seeing is a serious downturn, there might still be some congestion problems when demand returns to long-term trend. There could well also be some big structural changes going on in patterns of sourcing and supply networks that have yet to work themselves out, particularly since the geopolitical situation can always get a lot worse.
However, if you’re looking for an explanation for the past couple of years of high costs and choking congestion, the demand one is most likely. It’s a shame it needs the prospect of a big slowdown to prove it — I’d rather have growth with snarled-up ports than a recession with plain sailing — but that’s the way things are.
As well as this newsletter, I write a Trade Secrets column for FT.com every Wednesday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.
Charted waters
To quote the name of another FT newsletter, we live in disrupted times. The latest confirmation of this is the twice-yearly Brookings-FT Tracking Index for Global economic recovery (Tiger), which showed momentum in the world economy stalling and several countries either on the brink of recession or already plunged into one.
The data were released as global financial officials gathered in Washington for the World Bank and IMF’s annual meetings this week. Both bodies are expected to publish reports warning that the world economy is on the brink of recession.
Any bright news? Yes, if you are India. It is the world’s only large economy described as a “bright spot” in the Tiger research, with strong indicators pointing to robust growth this year and next. (Jonathan Moules)
Trade links
The EU is continuing to complain about electric vehicle tax credits in the US Inflation Reduction Act, which favour North American suppliers.
China’s semiconductor industry is bracing itself for a repeat of the pain the US inflicted on Huawei by imposing far-reaching export controls.
Henry Farrell and Abraham Newman, two of the great gurus of economic interdependence, say that weak links in finance and supply chains are easily weaponised.
If you’re interested in the politically charged saga of waivers for IP protection for Covid vaccines and treatments in the WTO, the Geneva Health Files news service has collected all its great in-depth reporting.
The Zambian sovereign debt crisis is setting international precedents on debt restructuring, as is Sri Lanka’s.
Trade Secrets is edited by Jonathan Moules
Source: Economy - ft.com
