At the heart of the inflationary surge of recent months, difficulties in supply chains are easing. But it will take time, and new problems can always arise. Experts have spoken of a “perfect storm” for 18 months, recalled this week the FinancialTimes. Added to the effects of the COVID-19 pandemic on consumer demand and the ability of businesses to respond to it are the effects of billions in government financial assistance to households, natural disasters on agricultural crops and the under-investment in the production of fossil energy in anticipation of the green shift. A container ship even found a way to get stuck for a week in the Suez Canal, which represents 10% of world trade.
And as if that weren’t already enough, Russia and China came to add another layer this winter, one by invading Ukraine, the other by stopping everything in the manufacture of the world in its fight against the virus.
These events have contributed to raising the costs of each step of increasingly long and globalized production chains, thus fanning an inflationary flame not as “transient” as most experts had believed. However, things seem to be slowly getting better. The average cost of transporting a container across the world’s oceans has fallen 45% since its peak this fall. The number of ships queuing at the Port of Los Angeles had dropped by 75% in June compared to the beginning of the year, even though it is the busiest time of the year. The New York Federal Reserve’s Global Supply Chains Tension Indicator was down 57% last month from its most recent high.
The number of delays and delivery costs are also down in the United States in the areas of transport by truck, train or plane, observed Tuesday analysts at Oxford Economics. Manufacturing plant inventories are growing rapidly and the volume of pending orders for goods is falling in all major sectors to the point of being lower in some areas, such as computers and metals, than at the start of the pandemic.
This improvement is partly due to inflation itself, explain the experts, since the sharp rise in prices has reduced the purchasing power of households in addition to encouraging them to turn to goods that are under less pressure.
The raising of central bank interest rates with the aim of curbing inflation is also beginning to have its effect on economic growth: it is slowing down, dragging with it consumer and business demand which was putting pressure on supply chains.
The gradual relaxation of health rules has also enabled households to return to their old consumption habits, which are more balanced between goods and services. Companies have also learned from their experience of the past few months to strengthen their supplier networks and manage them more efficiently.
From $120 a barrel a little over a month ago, the price of oil has returned to what it was before the start of the Ukrainian crisis, around $90, Desjardins Group economists analyzed on Wednesday. This is due to the darkening of the economic outlook, but also to the fact that the crisis has affected Russian oil supply less than previously thought and that other countries, including the United States and Canada, have increased their production. Metal and grain prices are also returning to more normal levels. For grains, we owe it in particular to meteorological and geopolitical factors. Harvests look good in Europe and North America. This news comes on top of the agreement reached between Russia and Ukraine on the export of Ukrainian grain, as well as India’s decision to lift its restrictions on the export of its own wheat.
The worst in terms of the supply chain therefore seems to be over, although “port traffic volumes, delivery times and energy prices remain at historically high levels”. But beware: these problems could still take “several months to fade,” warned the Desjardins economists. If not years, add other experts. And then, the situation will remain volatile and we do not know what the future still holds for us, noted one of the experts quoted by the FinancialTimes. A crisis could arise between China and Taiwan, which alone accounts for 60% of the world’s production of computer microprocessors, in particular.