John Carran: Glimmers of hope for global supply chains but relief for New Zealand could be delayed

Trucks loaded with shipping containers drive at Yangshan Deepwater Port in Shanghai, China. Photo / Getty Images

Opinion

OPINION:

Annual inflation climbed to 6.9 per cent in New Zealand during the first quarter of 2022 – a 30-year high – with a substantial proportion triggered by clogged global supply chains. This is reflected in large inflation contributions from price rises in areas such as furniture and furnishings, building materials, and used cars.

New Zealand has felt supply chain problems intensely because we import a large proportion of our capital goods (such as vehicles and machinery), as well as non-food related manufacturing inputs and consumer-related retail goods.

Our distance from source markets leads to more pronounced transportation cost increases for local businesses. It means that even if global supply chain dislocations start to gradually improve in the near-term, New Zealand may have to wait longer than many countries.

New Zealand and Australia freight rates from China have tripled since early 2020. While they have recently eased from their peaks in early 2022, they remain well above pre-Covid levels and could rise further given current restrictions in China.

The latest CPI data shows higher costs are being passed on to domestic consumers to a considerable extent. Although workers' wages have also risen rapidly in recent months, they have so far failed to keep up with rapidly rising consumer prices. This is squeezing peoples' purchasing power and spending confidence, which is dampening their purchases of goods and services.

Electronic card transactions fell 7.8 per cent from January 2022 to February 2022, and by another 1.3 per cent in March, according to data from Statistics NZ. The influence of the Omicron wave is clouding the picture to a degree, but unclogging supply chains will be critical to relieving costs for businesses and households.

Glimpses of improvements

The relaxing of Covid-19 measures globally has led to some easing of supply chain pressures in recent months. US manufacturers report that supplier deliveries, order backlogs and customer inventories have generally improved or stabilised over the past three to four months. There has also been a significant increase in commercial flights around the world this year, which has boosted airfreight capacity. But prices paid by businesses have remained elevated as higher commodity prices continue to filter through to overall costs for companies.

Further out, we expect the global demand for goods, which is running above pre-pandemic trends, to ease as people switch their spending more towards services, such as travel, bars, restaurants and events. This move has been delayed in the past two to three months due to Omicron outbreaks in many major economies but will eventually take pressure off supply chains scrambling to catch up with order backlogs.

Omicron and Ukraine war uncertainty

In recent weeks, cases of the Omicron variant have surged in China, with authorities mandating another round of severe restrictions to contain the spread of the virus. Large shipping queues outside Shanghai's port have raised fears global supply chain disruptions could intensify, causing further supply backlogs.

However, so far, this is not being reflected in materially higher global shipping costs or supply delays in addition to those that have been occurring since 2020. The rolling nature of lockdowns in cities also means that not all factories are closed at the same time.

John Carran, Investment Strategist and Economist at Jarden. Photo / Supplied

China's pandemic response differs from many other countries' utilisation of high vaccination levels alongside progressive relaxation of restrictions, which saw Omicron waves pass through relatively quickly. There is a chance the measures in China could persist for several months, which may again intensify supply chain issues.

The conflict in Ukraine has had a major impact on energy and grain prices, which has fuelled inflation globally. However, outside these commodities, the impact on supply chains has been marginal. Other products from Ukraine and Russia, such as wire coils (used in car manufacturing) and neon (used by semi-conductor manufacturers) can be sourced from buffers or other suppliers.

So, while China's Covid-19 restrictions and the conflict in Ukraine do not yet appear to be materially worsening supply chain problems, they are likely preventing significant improvements and present additional risks to supply chains in the near-term.

Longer wait for NZ

Given all of this, global supply chains are set to gradually improve over the rest of this year and into 2023. That's barring any further major shocks such as a new more harmful Covid-19 variant or a substantial escalation of the conflict in Ukraine. We therefore expect supply chain issues to be an increasingly smaller contributor to global inflation pressures over the coming months.

The picture is a little bit different in New Zealand. The later opening of our border in relation to other countries may delay supply chain improvement in the short-term, as aircraft capacity in and out of the country remains limited. While more flights will come into New Zealand as our border progressively reopens, it is unlikely capacity will return anywhere near pre-pandemic levels this year.

For New Zealand businesses and households, clogged supply chains may bedevil the local economy a while longer than overseas. While the outlook is highly uncertain, we may have to continue navigating these challenges through at least the rest of 2022 and potentially into 2023.

- John Carran is Investment Strategist and Economist at Jarden.