Diane Francis: Supply chain disruptions derail the global economy

All the pillars of prosperity are now wobbly
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The Chinese economy is slowing down. Energy costs are skyrocketing. Grocery shelves in some countries are empty. Automakers and other goods producers around the world have closed their doors due to a shortage of semiconductor chips. Shipping costs are skyrocketing, and auto dealerships and even Apple stores have record inventories. Fast food restaurants are short of potatoes and carpenters are short of wood. Supply chains are disrupted. Inflation is hiding.
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This is a Great Unraveling of the previously unfettered world trade and economic system. It is a ripple effect of the pandemic and pent-up consumer demand, but it is also a permanent readjustment of the global system due to geopolitics, trade disputes and an intentional decoupling of China by the ‘West and Japan.
For a commodity-focused country like Canada, the news is mostly positive, as logging, mining and oil companies are getting higher prices for their commodities than they have been receiving in years. Oil hit US $ 80 a barrel for the first time in three years last week and natural gas is on the rise – the two main reasons the Canadian dollar has strengthened in recent weeks against the US dollar. But, on the other hand, prices are generally on the rise and Canada is a huge importer of food and manufactured goods. And Canada’s largest manufacturing sector, autos and auto parts, suffers from shortages of chips and shrinking orders.
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But every country in the world is negatively affected by supply chain disruptions and these conditions are deviating from the global economy and preventing a full recovery of the economic fallout from COVID-19.
All the pillars of prosperity are now wobbly, from just-in-time manufacturing to offshore sourcing. The average supply chain journey from materials to store shelves involves at least 15 steps, and single step disruption creates world-class backups. This year, the cost of transporting a 40-foot sea container between North America and Asia has increased from US $ 5,000 to US $ 27,000.
To this quagmire is added the ongoing pandemic as parts of the ârichâ world as well as the âpoorâ world continue to enter and exit the lockdown. There are also tens of billions of additional vaccines left to administer. Africa is virtually drug-free, as is the Middle East, when only 35% of people in Latin America and the Caribbean have been vaccinated.
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Rising energy prices are slowing growth. For example, China shot itself in the foot by banning imports of Australian coal in retaliation after Canberra launched a probe into the Wuhan lab in China where COVID-19 started. About 70 percent of China’s electricity comes from coal, and excessive prices have forced huge regional electricity authorities to shut down access to tens of thousands of factories.
Geopolitically, China has crossed the line. Its aggression in the South and East China Seas and its hawkishness towards Taiwan, India and Japan backfired, forcing companies to shift production to Vietnam or repatriate it in order to eliminate dependence on Beijing. Already, a large part of Apple’s iPads are produced in Vietnam, along with its AirPods. Japanese manufacturers are moving production elsewhere or to Japan, thanks to a $ 2.2 billion fund set up to help its companies decouple from China.
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The result is that global industrial production is now stagnant, according to the Wall Street Journal, which quotes the Kiel Institute for the World Economy, a German think tank. This year’s forecast for global economic growth has been lowered to 5.9 percent from 6.7 percent, due to problems in the supply chain.
The danger, according to finance guru Mohamed El-Erian, adviser to insurance giant Allianz, is that it could result in âstagflation,â a combination of low growth and high inflation.
If so, central banks may need to act quickly to raise interest rates. This will further hamper growth and in turn affect the stock markets and especially Canada. Our governments are the most indebted among the G7 countries and Canadians have the highest consumer debt in the world. Buckle up your seat belts.
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