Supply chains disruption likely to continue in first half of 2022
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Q2 of 2020 proved to be the worst quarter for global trade on record, but the situation started to improve relatively fast.
Global trade is already at levels seen before the pandemic, but the growth rates peaked in Q2 2021 and then moderated. The recovery brought nonetheless several problems which proved to be persistent and will still affect global economic activity, at least in H1 2022. The present article will investigate these in detail.
IHS Markit GTAS Forecasting team now estimates the contraction of global merchandise trade in 2020 to USD 17,921 billion or -5.5% year-on-year. In terms of volumes, GTAS Forecasting estimates a contraction of global trade in 2020 to 13.94 billion metric tons or by -4.2% year-on-year.
In comparison, the WTO estimated the fall in volume to be -5.3%, IMF estimated it to be -8.3% (for the volume of trade in goods and services), and WTO (June 2021 Outlook) at -8.3% for the volume of trade in goods and nonfactor services.
COVID-19 pandemic is the most prominent driver of the current global economic situation. As a pandemic cannot be fully predicted, it leads to significant uncertainty.
The reaction in trade in 2020 was to a large extent consistent with the escalating global COVID-19 pandemic and steps taken by individual countries/territories in controlling or mitigating it. The overall impact of COVID-19 on worldwide trade and the global economy will depend on the duration, severity, and spatial distribution of the pandemic and directly linked to the severity of containment efforts taken by individual states. The reaction of states is mainly related to the capacity of their health systems to cope with the numbers of incoming patients (hospitalizations) and the corresponding number of reported deaths showing to some extent the incapacity of health systems to manage.
It seems that with the duration of the pandemic, governments and international organizations learned to react to it and mitigate it in a more balanced and less harmful way.
The health crises, such as COVID-19, create problems both on the supply side (e.g., due to lockdowns, forced production stoppages, disrupted global value chains) and demand-side (e.g., lower consumer confidence, delayed consumption, lower incomes). The impact of COVID-19 on the worldwide economy outweighed the prior outbreaks of SARS or MERS. It resembled more the effect of the infamous Spanish Flu of 1918-20. In terms of the duration of the pandemic, we can expect it to endure up to 3 years. It could transform in 2022 from pandemic to endemic.
Recent econometric analysis on monthly processed bilateral trade flows by the GTAS Forecasting team has shown that COVID-19 still exerts an adverse impact on international trade flows; however, the effect is slowly diminishing in magnitude (it is observed both for new cases, new deaths, as well as COVID-19 monthly average of daily Oxford's Government Response Tracker on the stringency of response to the pandemic by individual states). The global economy is not reacting as such to the pandemic itself but mainly due to the severity of reaction by individual states and changes in it and due to the shifts in behavior of economic agents.
The overall impact of COVID-19 on global trade and the global economy depends on the duration, severity, and uneven spatial and temporal distribution of the pandemic (changing with the subsequent waves of the pandemic) and the associated severity containment efforts taken by individual states. The health crises create problems both on the supply side (e.g., due to lockdowns, forced production stoppages, disrupted global value chains) and demand-side (e.g., lower consumer confidence, delayed consumption, lower incomes)
On 26 November 2021, WHO designated a new SARS-Cov-2 variant B.1.1.529 as a variant of concern, named Omicron, on the advice of WHO's Technical Advisory Group on Virus Evolution. This decision was based on the evidence that Omicron has several mutations that may impact the speed of spread, higher transmitability, or the severity of illness it causes; the markets reacted strongly to the new adverse information with an increasing number of states reintroducing stricter contingency measures.
The full impact of Omicron will be known only within several weeks when we will understand the severity of the mutation. Nonetheless, it is likely to impact global economic activity in Q1 2022; the variant potentially could become an adverse game-changer.
The cumulative number of confirmed cases of COVID-19 globally by 1 January 2022 reached 289.3 million and 5.45 million deaths.
The 2-week moving averages of new cases globally started to rise again by the end of October 2021, with global average death rates following with no apparent delay. Omicron led to the highest number of new cases reported since the pandemic outbreak in the last week of 2021, with no immediate impact, yet, on the number of COVID-19 related deaths. To illustrate the problem, in the U.S. the number of cases jumped to 500k daily in the last week of 2021 and then to 1 million confirmed cases daily in the first days of 2022. Thus, the shift from pandemic to endemic is becoming an actual reality.
There are two areas of concern now: the change in the number of hospitalizations (capacity of the health system to cope with the Omicron wave) and the level of vaccinations in the population.
According to some researchers, vector vaccines such as Russian Sputnik or Chinese Sinopharm and Sinovac's CoronaVac provide limited protection against Omicron, even with a booster dose, compared to mRNA vaccines such as Pfizer or Moderna. Thus, it could bring the countries that based their reaction to COVID-19 on vector vaccines under more significant pressures (particularly China (mainland) and Russia) in particular in Q1 2022.
The reported number of vaccinations globally reached 8.81 billion with 3.77 billion people fully vaccinated (with two doses or equivalent one dose), which is equal to 48.3% of the global population; to boost immunity to the new variant, an increasing number of countries, primarily advanced, started to distribute the third booster dose. At the same time, Israel began to distribute the fourth dose.
The disparities in vaccination levels and rates observed are of significant concern as a pandemic is global and needs to be resolved globally. The Omicron variant emerged in Botswana and then spread into South Africa, two countries, with low vaccination rates, before spreading globally. We can thus state that the size of the non-vaccinated population increases the chances of the emergence of new potentially more hostile variants of the virus.
The full impact of this new variant will be known only within several weeks when we understand the mutation's severity and the total size of the currently escalating wave. Nonetheless, it is likely to impact global economic activity in Q1 2022; the variant potentially could become a game-changer.
In our GTAS forecasting model, crude oil and natural gas prices approximate transport costs. The prices in H2 2021 reached the highest levels in the last seven years, thus rising overall transport costs. Despite the decrease in natural gas prices in December, they are still high.
The rising cost can put negative pressure on global trade, further aggravating disruptions in the global value chains. The hike in prices is due to reduced supply and enormously increasing demand in the recovery phase from COVID-19.
Natural gas prices are unlikely to decrease further in the winter season in the northern hemisphere due to the increased demand in the heating season. The problem is particularly visible in Europe, with geopolitical tensions with Russia playing a crucial role. Several scenarios, including an adverse one, are still possible in case of escalation of conflict with Ukraine.
The rise in container transport costs is partially related to rising fuel prices. It is also due to problems with supply for containers (global shortage of containers), continuing significant congestion in many seaports, particularly in China and USA, extended restrictions in many parts of the world due to COVID-19, and growing global demand in the recovery phase from the pandemic with the shift to consumption of manufactured goods from services. The present delays in transport with increased transport costs will further adversely affect many already stretched global value chains. The longer the problem lasts, the more likely are more severe adjustments to the existing value chains concerning both trade routes and production location (more backshoring and more nearshoring could be expected). ■