As another year is coming to an end, the global economy faces major challenges. What is clear after nearly two years is the pandemic and the response to it are provoking socioeconomic adjustments that may be felt for years, if not decades. It is increasingly probable that we are living through a transitory period in history such as World War I where what comes after is markedly different than what came before. The hope that the adoption and distribution of the vaccines would allow a quick return to conditions that existed in 2019 appears to have been overly optimistic.
One of the major global economic disruptions is the supply chain crisis. While there is ample commentary regarding what has caused it and how to fix it, much of what is written does not fully appreciate the complexity of the global logistical system. As someone who used to manage multiple air freight shipments in transit involving multiple companies, I (Chris) can say that one mistake can cascade through the system like dominos and create chaos.
Conversations with members of the European pump industry reveal consistent themes regarding what is causing the crisis:
Suppliers of parts overestimated the decrease in demand that would be caused by the pandemic and reduced productive capacity too much. They failed to foresee or appreciate the impact of government income support to businesses and individuals.
Suppliers are struggling to ramp up capacity to meet current demand.
Policy reactions to COVID-19 and income support to individuals have reduced the pool of available labor (especially skilled labor) such as truck drivers and port workers.
Layoffs and uncertainty led many workers in Western Europe from Eastern European countries to return home. COVID-19 vaccination certification differences and border crossing rules are causing many to not return.
China reducing production of strategic materials and/or deliberately reducing sales to the West is driving up prices.
Estimates of time needed to return to normal are one to three years.
The consensus in the European pump industry is that, economically, 2021 was better than 2020, but the outlook for 2022 is troubling for several reasons.
Order books may be full, but critical parts with no substitute can’t be obtained and product can’t go out.
When an unavailable part can be substituted, the purchasing, engineering and administrative effort can be overwhelming.
Significant price increases of scarce commodities are cutting into margins.
Many energy prices have jumped significantly in the past few months.
A feeling of concern exists among customers and won’t go away quickly.
The supply chain crisis is showing the limits of the “Just In Time” manufacturing model as practiced over the last 25 to 30 years. Today, we have a major breakdown in the global logistics system, which is causing shortages in stores, rising transportation costs and contributing to the inflationary environment. Contacts inside the freight transportation industry have indicated that traffic is so snarled that it will take the better part of another year to get sorted out—at a bare minimum.
Given the apparently deliberate withholding of supplies by China, manufacturers may move to shorten supply chains and increase flexibility. The globalization process that has been in place over the last 60 years will not be dismantled, but this is likely the beginning of a reversal and modification.
Finally, despite reassuring words from several United States policymakers, inflation seems to be rising and embedding itself into the system. One impact could be a deterioration in the value of the U.S. dollar, thereby making U.S. exports cheaper. However, other countries reliant on exports to grow, such as European economies, are likely to respond by weakening their own currencies. In addition, inflationary pressures on the U.S. dollar are contributing to the increase in oil prices, which will result in a drag on U.S. economic growth in the short to medium term.
In conclusion, aside from the financial crisis of 2007-2009, the global economic and political system over the last 40 years has been relatively stable compared to other historical periods. We have come to think of this stability as the norm. The pandemic has made the last year and a half bumpy, as most paradigm shifts are. 2022 is likely to continue to be bumpy.
