World’s damaged supply chains brace for painful recovery

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Signs are growing that a global supply chain crisis which has confounded central bank inflation forecasts, stunted economic recoveries and compressed corporate margins could finally start to unwind towards the end of this year.

But trade channels have become so clogged up it could be well into next year before the worst-hit industries see business remotely as usual – even assuming that a new turn in the pandemic doesn’t create fresh havoc.

“We’re hoping in the back half of this year, we start to see a gradual recession of the shortages, of the bottlenecks, of just the overall dislocation that is in the supply chain right now,” food group Kellogg CEO Steve Cahillane told Reuters.

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But he added: “I wouldn’t think that until 2024, there’ll be any kind of return to a normal environment because it has been so dramatically dislocated.”

The global trade system had never contended with anything quite like the coronavirus.

Starting in 2020, companies reacted to the economic downturn by cancelling production plans for the next year, only to be blindsided by an upswing in demand prompted by rapid vaccine rollouts and fiscal support for rich-world household spending.

At the same time, virus containment measures and infection clusters triggered labor shortages and factory shutdowns just as consumer spending was shifting from services to goods.

European Central Bank Chief Economist Philip Lane likened the fall-out to the aftermath of World War Two, when demand exploded and firms had to quickly retool from production of military to civilian goods.

Export-led economies like Germany have seen recovery choked by supply bottlenecks to their factories, while surging shipping costs have combined with higher fuel prices to push US inflation to a four-decade high.

Now, as the milder Omicron variant prompts authorities to loosen restrictions, there are tentative signals that supply snags may be unwinding.

Last week’s Institute for Supply Management (ISM) survey showed signs of improvements in US labor and supplier delivery performance for a third month, and purchasing manager testimonies in Europe also suggested easing pressures.

“Although supply chain constraints continued to stymie growth, there were signs that these were past their peak, a factor contributing to a slight easing in purchase price inflation,” IHS Markit said of the UK read-out.

While this has raised central bankers’ hopes of a more tangible reduction in inflationary pressures towards year-end, they also know that messages from the real economy remain mixed.

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