Supply chain disruption looks set to keep prices high and continue hitting consumers in the pocket well into next year, according to a new report by ASB.

Covid-19 has had two major effects on global trade, said ASB senior economist Mark Smith.

“Firstly, it has confined the world’s population to their homes, leading to a huge increase in online buying from around the world,” he said.

Meanwhile government stimulus boosted people’s ability to buy more online as other pastimes and expenses such as travel and entertainment were curtailed.

“Secondly, it has also forced the closure of factories, constrained labour and put more pressure on how goods are moved domestically and internationally,” he said.

“This combination created the perfect storm for major disruption to supply chains, and the situation will likely get worse before it gets better.”

Given the likely ongoing impact, ASB has launched a new regular report to track progress.

Economists see pandemic trade disruption as one of the significant drivers of consumer price inflation which hit 4.9 per cent in the September quarter and is expected to rise further.

Shipping costs have risen by as much as 500 per cent (compared to 2019) and there has been a transfer of pricing power from consumers to the transport and logistics industry, the report said.

Global trade still managed to grow 10 per cent over 2020 levels, outstripping increases in shipping capacity.

“Global supply routes are buckling under the pressure of strong demand and businesses are forced to pay more to move goods,” Smith said.

“Logistics capacity is stretched and there are acute container shortages. We expect even further pressure now we’re entering the peak global shipping periods associated with Christmas, the dairy export season and Chinese New Year.”

Meanwhile, another new report out today highlights the impact of the trade disruption on local exporters in 2021.

Chapman Tripp’s International Trade Trends & Insights described2021 as “another year of disruption, both internationally and on the domestic front”.

But it notes that despite ongoing supply chain issues, predictions of trade collapse did not eventuate.

“The World Trade Organisation (WTO) reports that this rebound is due in large part to pent-up consumer spending and fiscal and monetary stimuli,” the report said.

But that demand for goods had not yet spread to the services sector, despite some early signs of recovery.

“New Zealand total goods exports rose a barely discernible 0.3 per cent in the year to June 2021,” the report said.

“Services, however, sustained a whopping 46.4 per cent drop due to the collapse in tourism and transport services.”

Visitor spending was down 67.3 per cent, and transport services of people and goods to New Zealand were down 53.4 per cent.

There had been strong growth in ICT services exports (up 5.9 per cent) and charges for the use of intellectual property (up 10.1 per cent), but these were described as “small gains” compared to the tourism and transport losses.

China remained “far and away” New Zealand’s largest destination for merchandise
exports in the June 2020 to 2021 year, taking 31 per cent of our goods.

It was followed by Australia on 13.1 per cent, the United States on 10.8 per cent, the European Union on 6.6 per cent, and Japan on 5.5 per cent.

ASB said it expects New Zealand firms that have invested in supply chains with freight contracts (versus relying on spot rates) to fare better than others in 2022.

“At a national level, export resilience in larger sectors is offsetting weaknesses in smaller sectors,” the ASB report said.

But there was variance within industries, too.

In the dairy sector, for example, whole milk powder was up eight per cent whereas skim milk powder was down nine per cent on pre-Covid levels.

“In horticulture, kiwifruit has done well but apples haven’t. Seafood was greatly affected in the early days of the pandemic but has recovered well in 2021,” the report said.

“At the end of the June quarter, both export and import volumes sat at record highs, 5-6 per cent above pre-Covid-19 levels.”

Looking ahead, ASB is forecasting 6 per cent export growth for 2021 and 9.2 per cent for 2022.

Chapman Tripp’s report looked at wider issues such as the pre-pandemic trade war between the US and China.

“The so-called trade war between the US and China has had a lower
profile since Biden’s election,” it noted.”Despite this, competition between the two countries continues to intensify, as does talk of an economic decoupling.”

But recent reports suggested that there remained a deep interdependence between the two powers.

“The American Chamber of Commerce in Shanghai, for example, has found that 72 per cent of US manufacturers in China have no plans to relocate and, of the remaining 28 per cent, none were relocating production to the US.”

For New Zealand, a trade war between the world’s two largest economies – our first and third-largest trading partners respectively – had no upside, Chapman Tripp said.

“So any sign of a possible thawing is positive. Nevertheless, we have to expect that geopolitical tensions will continue and that the path to treadwill remain a finely balanced one.”

“It is not getting any easier to be a small country. Global competition is intensifying, the international rules based system is under pressure, and protectionism is on the rise – all at a time when the need for co-ordinated global action on issues such as climate change has never been greater.”

But the world has been here before, and the pattern of the past is that crises subside, the report concluded.

“One thing that Covid-19 has clearly shown us is that strengthening economic resilience and overall security will require more, not less, global cooperation.”

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