Diane Francis: Supply chain disruptions are derailing the global economy

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1. Diane Francis

All pillars of prosperity are shaky now

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Diane Francis Empty shelves in a grocery store in London, England. Photo by Chris J. Ratcliffe / Getty Images Files

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China’s economy is weakening. Energy costs are exploding. In some countries, grocery store shelves are empty. Automobile manufacturers and other commodity manufacturers around the world are closing due to the scarcity of semiconductor chips. Shipping costs are rising, and car dealerships and even Apple stores have record-low inventory levels. Fast food places are running out of potatoes and carpenters are running out of wood. Supply chains are broken. Inflation is lurking.

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This is a great disentanglement of the previously unimpeded global trade and economic system of the world. It is a consequence of the pandemic and the pent-up consumer demand, but also a permanent readjustment of the global system due to geopolitics, trade disputes and an intentional decoupling from China by the West and Japan.

For a commodity-based nation like Canada, the news is mostly positive as forest, mining, and oil companies are getting higher prices for their commodities than they have been for years. Oil hit $ 80 a barrel last week for the first time in three years, and natural gas is up – the two main reasons the Canadian dollar has strengthened against the US dollar in the past few weeks. On the other hand, prices are generally rising and Canada is a huge importer of food and manufactured goods. And Canada’s main manufacturing sector, automobiles and auto parts, is plagued by chip shortages and reduced orders.

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But all countries in the world are negatively affected by the supply chain disruptions, and these conditions are upsetting the global economy and preventing a full recovery from the economic fallout from COVID-19.

All pillars of prosperity are shaky now, from just-in-time manufacturing to offshore sourcing. The average journey through the supply chain, from supplies to the store shelf, is at least 15 steps, and a single step interruption results in top-notch backups. That year, the cost of moving a 40-foot ocean-going container between North America and Asia rose from $ 5,000 to $ 27,000.

The ongoing pandemic adds to this swamp, as certain regions of the “rich” world as well as the “poor” world continue to be closed. There are also tens of billions of other vaccines to be administered. Africa is virtually non-medicinal, as is the Middle East, while only 35 percent of people in Latin America and the Caribbean are vaccinated.

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Higher energy prices hamper growth. For example, China shot itself in the foot by banning Australian coal imports in retaliation after Canberra opened an investigation into the Chinese laboratory in Wuhan where COVID-19 began. About 70 percent of China’s electricity is coal-based, and inflated prices have forced huge regional energy authorities to ban access to tens of thousands of factories.

In geopolitical terms, China has crossed the border. His aggression in the South and East China Seas and his belligerence against Taiwan, India and Japan are backfiring, prompting companies to relocate or repatriate production to Vietnam in order to eliminate dependence on Beijing. Most of Apple’s iPads are already produced in Vietnam, along with its AirPods. Japanese manufacturers are moving production elsewhere or back to Japan thanks to a $ 2.2 billion fund set up to decouple their businesses from China.

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The result is that global industrial production is now stagnating, according to the Wall Street Journal, which quoted the Kiel Institute for the World Economy, a German think tank. This year’s forecast for global economic growth has been lowered from 6.7 percent to 5.9 percent due to supply chain problems.

According to financial guru Mohamed El-Erian, advisor to insurance giant Allianz, the risk is “stagflation” – a combination of low growth and high inflation.

If so, central banks may need to act quickly to raise interest rates. This will continue to slow growth and will in turn impact equity markets and Canada in particular. Our governments have the highest indebtedness of the G7 and Canadians have the highest consumer debt in the world. Buckle up your seat belts.

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Read and subscribe to Diane’s newsletter on America at dianefrancis.substack.com

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