- Renewed virus outbreaks, China’s zero-Covid policy and expected trade volatility during the Lunar New Year may continue to stress supply chains for now, trade credit insurer Euler Hermes said in a new report on Thursday.
- However, three factors could start to normalize trade in the second half of 2022: cooling consumer demand, healthy inventory levels and increased shipping capacity.
Global supply chain disruptions may continue until the second half of next year, trade credit insurer Euler Hermes said in a report published Thursday.
Euler Hermes cited renewed virus outbreaks, China’s zero-Covid policy and expected trade volatility during the Lunar New Year.
Measures to contain Covid-19 can affect manufacturing and shipping operations, exacerbating the supply chain crisis. Analysts have previously warned that the new variant, omicron, could deal another blow to supply chains.
Production shortfalls are behind 75% of the current contraction in global trade volume, while logistic bottlenecks are the cause of the remaining 25%, Euler Hermes economists wrote.
But this supply chain chaos is likely to ease in the second half of 2022 for three reasons, the authors of the report added.
Consumers are likely to continue buying goods at higher levels, but the insurer said demand has peaked.
The report noted that while excess savings accumulated during the pandemic have not been depleted, demand will normalize gradually.
“The impressive household spending shift towards (durable) goods rather than services, in the context of curfews and lockdowns, should be much more timid going forward, even in the downside scenario of renewed Covid-19 outbreaks,” the report said.
Particularly in advanced economies, households are moving toward sustainable consumption, and the replacement cycle of the goods purchased during the pandemic is at least a few years, Euler Hermes added.
With demand going through a “self-regulated normalization,” supply chains are likely to be under less pressure.
2. Inventories back to pre-Covid levels
After reducing stocks in early 2020, manufacturers rushed to restock to cope with the unprecedented rebound in demand, the report said.
“The good news is that the urgency to restock has clearly peaked over the past months … and the level of inventories is already above pre-crisis long-term averages among most sectors,” it said.
Euler Hermes also observed more capex in the U.S., which would help increase production capacities to meet higher demand. By comparison, Europe is relying on “above-normal capacity utilization rates” to produce more.
“We see a potential for a catch-up in investment in Europe in 2022 (and later on in production capacity), given favorable funding conditions and elevated corporate cash positions,” the authors wrote.
“Without production capacity increases and investments in port infrastructure, the normalization of supply bottlenecks in Europe could be delayed beyond 2022 as demand remains above potential,” the report added.
Shipping congestion should also be less acute in the second half of 2022 because capacity is increasing, according to the insurer.
The cost of shipping may remain elevated next year, but capacity is set to increase as global orders for new container ships hit record highs, amounting to 6.4% of the existing fleet, Euler Hermes said.
“The rapidly growing new transportation capacity orders … should turn operational towards the end of 2022, which should significantly ease shipping bottlenecks,” it said.
Some $17 billion is also slated to be spent on port infrastructure and waterways in the U.S., which should help reduce congestion, the report said.
The report also predicted that global trade volumes will rise by 5.4% in 2022 and 4% in 2023, following growth of 8.3% in 2021.
But trade imbalances could worsen. Euler Hermes’ forecasts suggest that the U.S. will register record-high trade deficits, while China will report a record-high trade surplus.
Over the next few years, Asia-Pacific is set to remain the main winner in terms of export gains, while energy, electronics, machinery and equipment sectors should continue to outperform in 2022.
Source:Abigail Ng | cnbc.com