New Obstacles Emerging in Supply Chains

“Obstacles are nothing more than a seasoning for success”.

― Mark Twain

Ómicron is likely to undermine activity through the imposition of new restrictions, interruptions due to the emergence of illnesses in staff and increased social distancing.

In some economies, many people had limited social contact around the holidays. And the knowledge that the wave of the Omicron variant of Covid-19 was associated with lower rates of serious illness than in previous waves, which may cause people to behave less cautiously, particularly when cases start to decline. .

In past waves, governments have been slow to ease restrictions as cases have dropped. On this occasion, the voluntary nature of the reduction in mobility could lead to a more intense and aggressive rebound in activity.

We expect that at the beginning of the year, any loss of activity caused by the Omicron variant will be largely offset during the second and third quarters, so that the expected level of world GDP for the year 2022 will be only slightly lower than a scenario without Omicron.

Although there are risks to the 2022 outlook, the main concern is that Omicron will worsen or lead to a slower improvement in supply chain pressures.

Recent research by New York Fed staff suggests pressures on supply chains reached their highest levels in November.

But the biggest concern arose over the possibility of worsening lockdowns in supply chains, in the face of China closures stemming from its zero-tolerance policy on Covid-19.

New outbreaks have already prompted lockdowns and lockdowns in places like Tianjin, Shenzhen and Beijing. Importantly, China’s industrial production will rise in the first quarter of the year, in contrast to the third quarter of 2021, when the Delta-related disruption caused its drop.

But big risks remain. Even if industrial production rises, temporary city or regional closures could be highly disruptive to supply chains in certain industries.

The anticipated stoppage of Ómicron, as well as heightened concerns about possible future waves, may exacerbate pre-emptive stockpiling and excess orders. As a result, even when the supply of scarce inputs increases, they may not go to where they are most needed, spreading their stock-outs. Even when supplies of scarce components (such as semiconductors) come back online, the outage can persist.

If the auto industry cuts production in the face of semiconductor shortages, this could become a constraint on production if those companies are slow to ramp up production again.

If companies were to go from facing a shortage of semiconductors to a supply glut caused by excessive chip orders and shortages of other components, future orders for semiconductors will shrink.

Producers of semiconductors and other scarce products could face excess inventories, prompting them to cut production.

An increase in the supply of inputs, such as semiconductors, is clearly a positive step, but it is not guaranteed to mark the end of production problems in the manufacturing sector.

A longer disruption to supply chains could increase inflationary pressures in the short term, triggering more aggressive action by central banks.