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Supply Chains In 2022: Four Reasons They Might Not Fully Recover

In last week’s article, we covered new developments that may alleviate global supply chain constraints. However, we stressed how we are not out of the woods yet and that constraints persist.

In this week’s article, we will be covering the different concerns that continue to plague the global supply chain going into 2022.

These concerns include the Omicron variant and its resulting economic impact, the continuing chip shortage, the persistent labour shortage, and increased shipping costs.

supply chains in 2022

Omicron Variant and Its Economic Impact

The new Omicron Variant that emerged in late 2021 has led to new Covid-19 spikes and, as a result, a slowdown in economic activity. According to the Wall Street Journal, Moody’s Analytics downgraded the US’ first quarter GDP growth from 5.2% to 2.2%. This is further compounded by the decreased consumer spending which is most readily felt by the restaurant and services sectors.

Vox reports that while some economists believe that the economic impact would not be as devastating as the Delta Variant and that the pandemic is at its tail end, as evidenced by strong stock market performances a few weeks ago, other economists are very much worried about the variant’s role in fueling inflation. The CPI, which measures weighted goods prices, rose by 7% in late December.

This is not helped by the new Omicron Variant strain. NPR writes that the new strain, known as “Omicron BA.2,” is potentially slightly more contagious than the original Omicron Variant. It is likely that the new Omicron strain can be the new dominant strain in many countries. Thankfully, it seems the severity of the new strain is not worse than the original Omicron Variant.

Continuing Chip Shortage

Moreover, the semiconductor chip shortage persists. We have also previously discussed this issue but, essentially, the chip shortage is due to the incredibly complicated and inflexible production process, companies cancelling chip orders and chip manufacturers reorienting production, and concentration of factories and production far away in East Asia which leads to lengthier shipping times.

Bloomberg states that the Biden Administration has recently concluded that the chip shortage will likely persist into 2022 and global chip supply chain strains will continue into 2023. The main issue continues to be “[the] significant, persistent mismatch in supply and demand for chips.” This, too, is allegedly correlated with current inflation concerns.

Remember, chips are important components in not only electronic goods but also vehicles and sensor technology. Consequently, the Verge states that the greatest hindrance to the normalisation of the global chip supply chain is less supply and production but rather demand. In fact, demand has increased by 17% in 2021 compared to 2019.

Persistent Labour Shortage

On the other hand, labour shortages have also become a more pressing issue. According to Brookings, the US currently has 10.6 million unfilled jobs in August 2021. CNBC reports that in that same month 4.3 million individuals left their jobs and that businesses have faced difficulties in retaining employees.

Small businesses and local governments are especially hard hit. This can be attributed to several reasons including worker’s limited tolerance of low pay and poor working conditions, limited child care opportunities, shifting immigration trends and labour market demographics. For example, older workers are choosing to retire early and, in the UK, BREXIT has caused a shortage of immigrant workers, says LSE.

Shortages can also be attributed to COVID-19 infections. The recent waves led to many workers calling in sick or have requested reduced hours. However, Brookings writes many workers who have had COVID-19 have also reported experiencing “long COVID” illnesses. Of the 31 million “long COVID-19” patients, 4.5 million have called in sick at least one in the past twenty months.

Increased Shipping Costs

Even if companies’ production have not been as severely affected by the pandemic or labour shortages, goods produced cannot be shipped off. ING states that shipping costs have increased due to heightened competition for ocean freight capacity owing to, again, imbalances in supply and demand, freight capacity being cut to reduce costs, increased tariffs, and limited number of dock workers.

However, Reuters reports that shipping a standard 40-foot container has decreased 15% from a record high of USD 11,000 in September, though this is a far cry from the initial USD 1,300 prior to the pandemic. 

Additionally, while shipping logjams in November had decreased to 11% from record highs in August, this is still off from pre-pandemic levels of 7%. Consequently, “cheaper goods will proportionally rise more in price than dearer ones, and… poor nations producing low-value-added items such as furniture and textiles will take the biggest hit to competitiveness.”

What Does It Mean For You?

This week’s article along with last week's show that global supply chains, while improving, still continue to face serious challenges. From the Omicron variant and its resulting economic impact, the continuing chip shortage, the persistent labour shortage, to increased shipping costs.

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