The Big Shortage
Will all the shortages and supply chain disruptions derail the global economic recovery?
October 18, 2021
Global supply chains are in unprecedented flux. But many are taking away the wrong lessons.
Shortages have quietly kickstarted a robust global recovery in business investment. This was a key missing ingredient in the post-2008 recovery and is crucial for lifting capacity and productivity.
Given an unfolding backdrop of higher growth and higher inflation, several areas of global asset markets are ripe for a re-rating.
The world has been transfixed this year by a strange spectacle: a scarcity of nearly everything. It has been a cinematic experience, complete with congested shipping lanes, limited energy capacity and rationed microchips. To be sure, this kind of drama is an entirely unfamiliar genre. The decade after 2008’s global financial crisis was marked by chronic oversupply with deficient demand. Yet the gluts of the 2010s are now giving way to a far different world.
Welcome to the new shortage economy. Readers will now be well-acquainted with the struggle. Routine purchases have become multi-month odysseys. Precise delivery times are a thing of the past. The kitchen appliance you are looking to replace? Check back in January. New furniture? Try next summer. Want workers for a home improvement project? Lol. Need a children’s bike for Christmas? It would be easier to get Timmy a lump of coal (though that is in short supply too).
What to make of all this? The first question that should be asked is why — why have these shortages run so deeply and across so many industries? Andrew Bailey, Governor of the Bank of England, recently concluded that the shortage economy is not the result of a few large bottlenecks. Rather, it is a confluence of factors. “There is no common cause” he said flatly. Then, making a brave attempt to unravel the conundrum, Bailey tossed in this nugget: “What we have to do is focus on the potential second-round effects from those shortages … and central banks must preserve their optionality.” An English translation, which is yet to appear, would interpret this as something like: “we don’t really know what is happening but admit that inflationary pressures are lasting longer than we thought.”
Causes Of The Shortages
Of course, much of the shortages are pandemic-driven. The mismatch of supply and demand dynamics are not difficult to see: the world has just witnessed the largest demand surge since World War II, caused by post-Covid reopening, and the largest supply collapse the world has ever seen, caused by Covid lockdowns. Add in other obvious factors: billions in cheques to cabin-fevered consumers (that have radically shifted their spending patterns), asynchronous openings across countries and, for good measure, some $11 trillion in government stimulus. It is no surprise, then, that a purring and seamless international assembly line has been replaced with a snarled and shambolic supply chain.
But more complex reasons lie behind the current mess. This is no longer the economy of the past two decades. It is clearly something else — a departure from the Ricardian fantasy of frictionless and unfettered trade across national borders, where companies optimized their deliveries with “just in time” inventory management. That system failed the pandemic stress test. Unsurprisingly, supply chains without redundancies are fundamentally fragile. And now we have a new subversion: weaponized supply chains, where geopolitical interventions from several countries attempt to gain competitive advantages (whether with constraints on semiconductors or natural gas pipelines).
Clearly, global supply chains are in unprecedented flux. But many are taking away the wrong lessons. In fact, given that shortages are such a visible and politicized topic, we have entered high season for narrative-building based on misinformation and backward-looking perspectives.
Will Shortages Get Resolved?
Meanwhile, a wider-angle view offers far more insight. Actually, the most overlooked observation is also the simplest one: shortages are being resolved, albeit at different speeds. Witness the roller coaster ride in lumber prices, which have now collapsed. Used car prices are moderating. Semiconductors, ostensibly the new “oil” of the global economy, and their associated crunch has prompted a wave of investment — China is now throwing a stunning sum of capital and people at the problem. Rather than scarcity, overcapacity likely lies ahead in the coming years.
What’s more, the cost of moving things around the world, while elevated, is no longer soaring. Shipping stocks are all turning down. Backlogs are beginning to clear and container traffic is starting to normalize. Real-time data indicates that the worst is behind us.
But if there is a big blind spot, it is this: the inability to perceive the outlines of a looming productivity boom. Once seen, it is hard to look away. That the world is undergoing a massive shift in the way commerce is conducted is obvious. What is less obvious is that the pandemic has offered a rare opportunity to kickstart sluggish economies. Companies across the world are not only working on supply chain issues but spending on new plants and machinery in ways they haven’t done for decades. Globally, corporate capital expenditure, will jump by 13% this year, with growth in all regions and broad sectors (figures from S&P Global Ratings). A recovery in business investment is critical for lifting capacity and productivity.
Consider the experience of IKEA. Even before the pandemic, the Swedish company had begun its biggest transformation in its 78-year history — planning an end to customers collecting and building their own furniture (thank goodness), replacing the shopping experience with virtual reality-assisted e-commerce. Yet Jesper Brodin, chief executive of the biggest Ikea franchisee Ingka, recently told the Financial Times that the pandemic has “given us a boost like never before to speed up our transformation.” The company has accelerated its restructuring, and e-commerce sales are soaring.
Of course, IKEA is just one example. But it is representative of a wider shift. For global growth, the missing ingredient of both the recoveries in the early 2000s and after 2008, has been meaningful capital spending, with most companies preferring the capital light investment of software and smartphones. This is certain to change in the coming period across all industries.
Consider the current energy crisis. After years of underinvestment by fossil fuel producers, no one should be surprised that traditional energy prices are now soaring. In fact, the transition to a lower carbon economy was always destined to be clunky. Shortages in China and the EU highlight the continuing need for fossil fuels despite global efforts to decarbonize. Renewable energy will take decades to build up.
But the current crisis is only speeding up this transformation. And, the race to build a new energy system will be enormously capital intensive, comparable to the post-war reconstruction boom, as infrastructure, transportation networks and technologies require vast amounts of fixed capital investment. China-US geopolitical tensions actually reinforce this trend. The experience of the United Kingdom and Germany in the late 19th century and early 20th, along with the US-Soviet Cold War, suggest that big rivalries act as spurs for massive investment in technology, science and other innovations. Today, a key focus is alternative energy.
What about the current labour crunch? Staffing has become a key problem for nearly all sectors (including wealth management). Admittedly, the causes of shortages are numerous — aging demographics in developed economies, preference for “gig economy” jobs, etc. — and are unlikely to go away soon. But there is also fertile ground for productivity-enhancing breakthroughs. In fact, clues existed before the pandemic. A 2013 study on modern employee management by Stanford University found that hybrid home-office work led to a 13% increase in performance, with improved work satisfaction and less staff turnover.
It also has the potential to encourage a more diverse range of people into the workforce, including people outside of major cities and even different countries. Other innovations in areas like automation will have enormous impacts on productivity too. And, labour shortages are finally driving wages higher (which was another missing ingredient of the post-2008 world, where weak investment and austerity dragged on employment and incomes for years). Ultimately, all of this will contribute to a virtuous cycle of increased wages, rising capital spending and higher global growth.
If the above sounds too rosy, consider the primary risk here: inflation. This needs to be closely monitored. While easing of bottlenecks will bring some prices down, higher price pressures will be with us for some time. Demand is still booming and unlikely to moderate any time soon. That is the story of recent US inflation figures, with the CPI rising to 5.4% year-on-year in September to a post-August 2008 high, up from 5.3% in the prior month. And it is the story across the globe. And importantly, China, backed by a chronically strong currency and rising domestic market, is no longer a deflationary force upon the world economy, as it was in the last two decades. (See “Global Inflation: Has The Force Awakened” for further insight). These dynamics should be monitored closely.