Supply chain pressures: taking stock of the outlook

For the global economy, 2021 was defined by the recovery from severe lockdowns during the early part of the COVID-19 pandemic and the litany of supply chain pressures which arose from this. Perhaps the most prominent factor behind the disruptions has been a surge in demand as economies re-opened, with spending tilted towards goods and away from services. This has been exacerbated by a number of COVID-19/recovery-related global production and transport issues, such as shipping delays, port congestions and labour shortages.

Supply chain issues have also led to significant input cost increases for manufacturers, which is feeding through to higher consumer prices.

In December, we asked companies if they were experiencing significant supply chain disruptions and if so, how long they expected these to last. Only 10% of distribution firms and 13% of manufacturers were not facing substantial impacts, along with half of services firms.

Of those that were disrupted, over half of firms expected this to last until at least the second half of 2022 (58%), with over a quarter (28%) expecting disruptions to continue into 2023 or later. A further 16% were unsure about when disruptions would end.  The range of responses likely reflects the uncertain outlook but also the multifaceted nature of the current spate of issues, with different firms facing a different set of circumstances.

Encouragingly, there are tentative signs that some aspects of supply chain pressure may be easing or at least stabilising. The number of job advertisements for drivers stabilised over the Autumn and fell sharply in the new year, delivery times are no longer lengthening, and input purchases are growing.

Conditions are expected to improve throughout 2022 as progress in combatting the virus improves demand for consumer services and the pace of goods demand is now easing back to more normal levels, supported by the usual post-Christmas and Chinese New Year lull, and the ongoing cost of living squeeze.

However, conditions are unlikely to return to pre-pandemic norms any time soon. Goods demand is expected to remain elevated at least while COVID-19 remains a threat, but will probably be permanently higher in some industries. Some aspects of supply chain pressures will require the addition of new capacity even with a demand renormalisation, such as in the semiconductor industry which faces an accelerating growth trend. Even when all of these issues are solved, the large backlog of work that has accrued over the past year will take some time to work through.

So, supply chain disruptions are likely to remain with us in some form for the duration of 2022. However, the risks to this outlook are large in both directions. With supply chains stretched to capacity, any new disruption could cause headwinds to strengthen again and slow progress. By contrast, if goods demand growth slows faster than expected or even falls, this would ease pressure significantly. This could happen if inventories are wound down, the health situation improves faster than expected or consumer spending takes a downturn.

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