The global pandemic has hit the world’s supply chains from many different angles. On the supply side, border closings and lockdowns kept production sites shuttered. On the demand side, consumers who couldn’t take vacations or dine out subsequently increased their spending on durable goods. This created a perfect storm of challenges for businesses as they tried to satisfy the demand. Many of them couldn’t secure the raw materials needed for production, forcing the smooth cadence of trade flows to become uneven.
This, in turn, created the many supply chain disruptions that most industries are experiencing right now. Alleviating these problems is going to take time. “Because more than one cause or event got us to our current situation, one single solution will not relieve the stress,” Citi points out in a new report, “Global Supply Chains: The Complicated Road Back to ‘Normal.’”
In its report, Citi details the macroeconomic trends that are disrupting global supply chains and shares its prognosis on when relief may come. The report details the challenges that have emerged for supply chains as a result of the pandemic and highlights the hardest-hit sectors and what their road to recovery looks like. Here are some of the biggest issues Citi says are creating the greatest headaches for supply chain operators right now:
Labor constraints. The labor market “tightness” is especially notable for the U.S., says Citi, where employment is still down by roughly four million relative to pre-pandemic. “But whatever the causes, labor markets in many countries around the world are struggling to supply the labor that firms are demanding,” it concludes. “How this imbalance eventually resolves will be a key factor shaping supply chains, and economic performance more generally, in 2022.”
Current supply chain management practices. Pre-pandemic, firms scoured the globe for the cheapest suppliers in an effort to achieve cost-effectiveness. The result was often far-flung and sometimes complicated supply chains that spanned national borders. “With supply chain disruptions now cascading through the global economy,” Citi says, “it’s clear that these approaches were critically conditioned on the assumption that linkages with the rest of the world were reliable, predictable, and cost-effective.”
New COVID variants. Citi says the delta variant played a central role in the intensification of supply chain pressures in August and September of 2021, and that it continues to wreak havoc on these global networks. Omicron is the latest variant but may not be the last to emerge during the pandemic. “The resurgence of the virus made an already challenging situation even worse,” it notes.
Higher demand for goods. Given the nature of the pandemic, the consumption of most (non-essential) services became nearly impossible in the early months of the pandemic and more difficult than usual afterwards. Spending on durables soared through 2020 and has remained high in 2021. “It has retreated a bit recently, but that mostly reflects a slowing in auto sales—due not to a slackening of underlying demand but, rather, to the inability of dealers to get the desired cars,” Citi adds.
Fiscal and monetary stimulus. Another contributing factor to the disruptions has been the massive fiscal and monetary stimulus provided by the public sector to fight the pandemic, Citi points out. “With global consumers sitting on trillions of dollars of excess savings, the “dry powder” for future expenditures seems significant. The open issues are how much of this is eventually spent and at what pace?” the financial services firm asks. “Also, as a corollary, to what extent does the resulting spending fall on goods versus services?” It says the answers to these questions will shape the path of global recovery over the next several years.
Ultimately, Citi says the overall solution to resolving supply chain disruptions is tied to improvement in the pandemic. Addressing the other macroeconomic issues will take time, but the financial services firm says it’s already seeing key indicators improve (e.g., congestion issues at U.S. ports, and prices in energy markets and commodities).
“Without any other major setbacks,” it concludes, “we believe supply chain issues should feel better in the first half of 2022 but probably won’t get back to normal until well into 2022 and beyond.”