Shutting down an economy is extremely painful, but it’s fast. So, does it follow that getting it going again will be quick and smooth? While most thought a restart should be a snap, according to media reports, things aren’t that straightforward. Is something going wrong, or is a bumpy restart just par for the course?
From the global consumer’s vantage point, they were ready to roll a long time ago. Lockdowns clobbered retail sales in March and April 2020 and were right back up again by June. As a measure of demand, this was perhaps the indicator that was most reassuring. After all, consumers make up about 60% of gross domestic product (GDP), 70% for the American variety. More recently, things have been choppy. Is demand faltering? Hardly.
Recent hits to sales correspond closely to renewed lockdowns, either partial or full. Moreover, with restrictions limiting the things we can spend on, extra cash—lots of it—has been piling up in our bank accounts. If there’s an issue with economic restart, it doesn’t seem to be coming from the demand side of things.
Supply is a different matter. Stories of shortages are getting more frequent. First, copper went on a tear, which was scary, given that this key metal is a trusted bellwether of other things. Well, the other things didn’t let copper down; since then, there have been very tight supplies of building materials, and well ahead of the building season. Auto producers are facing searing sales, but they can’t source enough computer chips. Production has suffered, while North American lot inventories have plummeted. And we were swimming in supplies of extra oil ahead of the pandemic, but well-timed supply restrictions have sent current prices higher than anyone imagined just one year ago.
People are noticing. One of the most popular conference questions I get these days is about inflation. Price pressures aren’t showing up in the reported Consumer Price Index (CPI) and Producer Price Index (PPI) numbers, so there’s no sense of panic. Moreover, central banks are taking care to manage expectations, assuring the public that prices will be well-behaved. Ultimately, they will, but producer prices in the United States are on a monthly tear right now. They are up 12% at annual rates over the January-March period. This has lifted year-to year growth way above the 2% threshold, clocking in at 4.3%, the highest it has been since 2011. Although this is a relatively small share of final costs, transmission of this to final prices is a short-run possibility, if a temporary one.
If supplies are tight, how are supply chains doing? Early indications can be found in the Purchasing Managers’ Index (PMI) data. The survey chronicles, by country, input prices paid by producers, supply delivery times, and delayed shipments of manufactured goods. What do they say?
The Institute of International Finance (IIF) researched these three elements and ranked countries’ performance based on their own past performance. On supplier deliveries, the U.S. and large European economies are some of the most compromised. Canada is at the lower end of the spectrum for developed economies, but key emerging markets have solved supplier logjams well ahead of the rest of us. Canada was also middle-of-the road in input price changes we face.
So much for relative measures; how does this stack up in absolute terms to global supply chain disruptions of the past? Again, according to the IIF study, this ranks right up there with the initial COVID-19 disruption and the 2011 Fukushima Daiichi nuclear disaster and is far more significant than the 2008 peak oil disruption. Not great news; if that’s the case, how long will this last?
Technically, not long. After all, we had enough capacity before the pandemic, and we’re still running below pre-pandemic levels on average across industries. This should be a matter of moving into that capacity, which is always easier in theory than in practice. What are some of the practical considerations?
First, there’s labour. Are people comfortable rushing back into a mine, a factory or an office building working side-by-side with others? And have we seen skill atrophy in worst-hit industries? Second, to what extent are business activities like large investments, mergers, acquisitions, and new builds being impacted by lack of person-to-person, trust-building exercises? Third, business leaders may be hesitant in the face of the on-off lockdown decisions to be the first to go all-out. Next, the ease of a restart is likely inversely proportional to the length of total shutdown—and this for some has been a long one. Finally, for this to all work, the key logjam in global shipping needs to be solved.
