China lockdowns to delay normalisation of supply chains

Karsten Junius April 28, 2022 09:48

Hard data published in recent weeks suggests that prior to the start of the war in Ukraine, the US and European economies were starting to feel the benefits from an easing in global supply chain pressure. Indeed, a new index developed by the Federal Reserve Bank of New York – based on global transportation costs and supply-related components from surveys – shows that pressures peaked in December and fell in the first three months of the year. Traffic at US ports also fell sharply during this period. For example, average days at anchor and berth in the port of Los Angeles fell from around 22 days at the peak in December to just under five days at the end of March.

Greater availability of inputs helped boost US manufacturing production, which rose by 0.9% in March. Car production, which was hampered by a lack of semiconductors last year, increased by around 5%, while prices of used cars fell by 3.8%. This decline alone shed 0.2pp from the core CPI inflation rate in March. Reduced supply chain pressures also allowed companies to restock. The Inventory Sentiment Index (ISM) rose from 34 in November to above 50 – the level that suggests companies have sufficient inventory – in February for the first time in over a year, though it declined again last month. Improvements are also notable in the euro area, with production of durable consumer goods increasing by 2.7% MoM in February.

However, ongoing lockdowns in China, and in Shanghai , are likely to reverse the improvement in supply chain pressure that has occurred since the end of last year, and could well lead to a further deterioration over the coming months. Indeed, Shanghai is one of the largest manufacturing centres in the country, with heavy concentrations of car and electronics suppliers. It is also home to the largest container port in the world, accounting for approximately 20% of China’s export container throughput. Data that run up until the end of March, and which therefore only overlap with the first few days of the lockdowns, show that foreign trade cargo throughput fell by 6% YoY last month. The April numbers will almost certainly show a bigger drop. What’s more, anecdotal evidence indicates that closures of warehouses, plants and large parts of the port and the airport in Shanghai have led shipping units to be stranded [in wrong places/at sea] and freight to pile up. If most of the lockdowns are lifted by the end of Q2, as we expect, the drawdown of backlogged freight is likely to happen at the peak of the shipping season. According to logistics experts, this could once again overwhelm shipping lines, lead to port congestion in Europe and the US later this year, and further increase transportation costs.

While Europe and the US largely import finished goods from China, renewed delays and congestion in ports will undoubtedly have repercussions on other imports. This, together with the war in Ukraine, is likely to disrupt supply chains further, clouding the outlook for industrial output, and add to already elevated inflationary pressures. In addition, retailers in the US continue to operate with rather low inventories, which also means that delays in imports from China could lead to temporary shortages of some goods, resulting in an increase in their prices. Together, these disruptions could delay the decline in inflation across advanced economies that we expect to see in the second half of this year.

In short, the data over the coming months are unlikely to provide any clearer signals to both investors and policymakers about the underlying trends that are shaping the global economy. But, given the already significantly elevated inflation rates, any external shock that delays their downward adjustment will push, in our view, an increasing number of central bankers into calling for a more rapid normalisation of monetary policy.

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Karsten Junius

Chief Economist, Head Economic Research at Bank J Safra Sarasin