Global boom and bottlenecks

Supply shortages affect the near-term outlook for the global industrial cycle

15 June 2021 Janet Henry, Global Chief Economist

Global demand for goods has rebounded remarkably. Commodities prices are booming. World trade in goods is well above pre-pandemic levels. Manufacturing production has surpassed the March 2019 peak that was followed by industrial recession – well before COVID-19 struck.

But within the global industrial recovery, regions and sectors vary greatly. Asia has fared best, with output in mainland China, Taiwan and Singapore 15 per cent-25 per cent above early 2019 levels; the US, Eurozone and Japan are down 3 per cent-4 per cent. As mainland China accounts for nearly 30 per cent of global industrial production, it raises the worldwide average.

Sectoral differences explain national variations, especially where industrial activity involves electronics, cars, wood or commodities such as copper that have seen big demand increases. But some sectors are facing big supply shortages, sometimes exacerbated by shipping problems.

Pandemic-led demand for home computers, TVs, phones and games has caused a semiconductor shortage. The car industry, which quickly cut production last year and cancelled orders, and then saw consumer sales surge, has been particularly disrupted. The lumber industry also wrongly anticipated a housebuilding slump, rather than the global housing boom that materialised, and cannot now meet demand, resulting in soaring prices.

Assuming vaccine roll-outs allow economies to re-open and consumer spending to rotate from goods to services – as is already happening in the likes of Australia and America – the best of the global industrial upswing has probably already been seen.

But that does not mean we will be seeing a synchronised rapid downswing across sectors or economies. Production in China and some other parts of Asia may lose a little steam while European production should finally start to catch up.

The overall pace of global industrial production will depend on how consumer and capital spending evolves, how inventories are rebuilt from what are rock-bottom levels, and whether the pandemic further disrupts output. Some areas such as vehicles should even see a renewed rise in production as chip availability improves.

One key area of goods spending that should strengthen is capital investment. Global investment spending in 2020 fell less than feared in much of the world, even if primarily in technology and construction. It was broader in mainland China where the stimulus programme targeted investment rather than supporting household incomes. It is now the US and EU that plan more infrastructure spending.

Machinery and equipment investment in China and elsewhere should improve further in the coming year, which means some major capital goods producers like Japan and Germany should see exports supported. But, not all commodity producers will benefit given the evolving mix of investment spending.

Global commodity prices have nearly doubled since April 2020, but the rally should lose steam as goods spending slows, mainland China clamps down on speculative activity, and some supply constraints are relieved.

However, the risks of goods price inflation staying sticky into early 2022 continue to grow as some input bottlenecks will take longer to resolve – including certain semiconductors – and incidences of labour shortages could take months to clear.

Central banks’ near-term forecasts allow for this period of higher inflation, but the medium-term outlook hinges on the labour market and what happens to inflation expectations, and then on how policymakers respond – not on the current bottlenecks.

First published 3rd June 2021.

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