Though the world appears to be finally moving beyond COVID-19, the global supply chain network is anticipating a lengthier return to “normal.” The compounding of several structurally embedded issues has made this unique economic recovery particularly challenging.
These setbacks are unlikely to stop the ongoing movement toward a more globalized economy.
Even if the economy stutters or falls into a brief recession, the benefits of globalizing supply chains remain abundant. Nevertheless, in order for the economy to ever reach its full potential, several key obstacles will need to be overcome.
Bracing for Rough Waters
It is unlikely that there will be much relief from the global supply chain crisis before the end of 2022. Many of these problems will likely persist well into 2023 and possibly even beyond that.
But rather than taking drastic action or abandoning any multi-year development projects, it is crucial for all involved to continue to remain patient.
The variables affecting the performance of these supply chains are numerous. Among the most relevant include widespread labor and semiconductor shortages, an unbalanced allocation of shipping containers, and conflicting COVID-19 protocols (particularly, China’s “zero tolerance” policy). Other systematic challenges include global inflation, the ongoing conflict between Russia and Ukraine, access to certain resources, and more.
Unsurprisingly, these challenges have taken a toll on the global economy. A recent GDP report indicated that global GDP decreased by an estimated 1.4 percent (year-over-year) in the first quarter of 2022. If the second quarter also produces negative growth rates—and there are currently quite a few indicators that this scenario is likely—then the economy will have technically fallen into a state of recession.
In many ways, the economic and financial anomalies that occurred over the past few years have made this situation seemingly inevitable. Unprecedented levels of government spending across
the globe—even if warranted in many situations—placed most currencies on the fast track to losing their values over time. And with interest rates being one of the few tools that central
banks can use to influence their money supplies, the recent rollout of interest rate hikes is certainly far from surprising.
Hopefully, the pandemic will be a somewhat isolated incident. But if it’s not, we can at least hope that international governments and their supporting institutions will be better prepared for the next international crisis. If economies continue to globalize and become more interconnected, the stakes will become even higher.
Finding Ways to Steady the Ship
There are still quite a few significant changes that could potentially accelerate the recovery timeline. Even though a full recovery by the end of the year remains unlikely, an accelerated timeline would be universally beneficial.
One of the most obvious shifts would be a temporary (or perhaps permanent) shift of resources from goods consumption to services. When compared to goods, services are typically a bit more flexible and easier to modify in the event that a sudden global challenge has emerged.
Another solution—perhaps a bit more forward-thinking—would be to completely restructure global supply chains and increase room for error or change. In the years leading up to the pandemic, most firms were operating with razor-thin production-time margins, meaning that if an unexpected obstacle were to suddenly arise, they would be unlikely to adapt within an adequate timeframe.
Well, that challenge did emerge, arguably tenfold what even the most conservative supply chain participants were expecting. By reinventing inventory systems (whether by choice or by regulation) will help eliminate the risk and consequences of sudden disruptions, including natural disasters, health pandemics, and even war.
Furthermore, increasing reshoring and nearshoring efforts—a sort of localized restructuring within a broader global system—will help decrease certain shipping costs and make the entire shipping system considerably more predictable. As an added benefit, reshoring and nearshoring will also likely decrease the carbon footprint yielded by the value-added cycle.
In other words, innovation and adaptability will be key to both current and future success. The three countries that will need to take charge and innovate the most will be China, Germany,
and the United States—the largest, second-largest, and third-largest global value chain (GVC) participants, respectively.
There is still ample reason to believe that things can—and will—get better. A three-year recovery timeline, while grueling as it unfolds, is relatively short compared to previous global recoveries. As long as we maintain our natural need to create and consume, we will continue finding ways to do so.
About the Author
Christian Mueller is Vice President and Senior Manager of the Special Risk Management unit for Risk Services – Americas. In this leadership role, his responsibilities include managing Atradius’ most risky buyers’ portfolios.