Supply chains ease due to positive supply shocks
The message in several economic data points published last quarter was clear: "problems in global supply chains are waning". Delivery times for products are decreasing and costs for international shipping are falling. Together with tensions in energy markets, these supply problems were the driving force behind rising inflation over the last two years. So, the fact that these supply problems appear to be abating is good news. More important, however, is the cause of this decline. If positive supply shocks occur, such as, say, a reopening of a Chinese port after a covid quarantine, the need for demand destruction by monetary policy to curb inflation decreases.
There are plenty of variables indicating global supply chain problems. The Federal Reserve Bank of New York summarised these variables concerning production delays, delivery times and transportation costs in a Global Supply Chain Pressure index, shown in Figure 1. Such variables are of course driven by both demand and supply factors, but the index is constructed in such a way that it tries to filter out the effects of changes on the demand side. It is thus a first indication that we can effectively speak of a positive supply shock, rather than a negative demand shock. Container shipping seems to confirm this assertion: rates for container shipping collapsed worldwide, even though global container shipping remained close to its trend growth.
The Global Supply Chain Pressure index is not yet at its baseline level; the full normalisation of supply chains takes time. Even if the main causes of disruptions have been removed, it takes time for this to fully permeate through often complex supply chains.
Supply and demand shocks
Based on the methodology described in "Global supply chain disruptions continue to hamper European industrial recovery", we calculate the demand and supply shocks specifically responsible for the congestion in global supply chains. We then consider the effects of these shocks on the eurozone economy. Whereas we previously found invariably negative supply shocks due to the aftermath of covid and positive demand shocks coming from excess demand due, among other things, to accumulated savings and deferred purchases during quarantines, in the third quarter of this year we observe just a small positive demand shock but a large positive supply shock. Thus, the decline in pressure on supply chains in the third quarter can be attributed to a strong positive supply shock, not a slumping demand.
The supply shock in the third quarter made a positive contribution to economic growth in the euro area. Without this supply shock, responsible for easing pressure on global supply chains, GDP growth would have been 0.26 percentage points lower in the third quarter of this year (Figure 3). Following this shock, a positive impact of the same magnitude can be expected for the fourth quarter of this year. And with these positive supply shocks, the GDP impact of the negative shocks of the previous quarters is neutralised.
The model used includes several variables concerning the market for intermediate goods. The same calculation indicates additional growth in output in this product group of 2.3pp in the third quarter and 0.8pp in the fourth quarter. Producer prices for intermediate goods experience a negative impact of -0.9pp and -0.2pp, respectively.
The positive supply shock in global supply chains helped ensure that growth rates and producer prices for eurozone manufacturing were not as dramatic as you would expect based on high energy prices.
First figures for the fourth quarter show a further (sharp) drop in container rates. It is possible we will talk about a negative demand shock this time. Business confidence indicators may score better than consumers, but business inventories are gradually filling up and energy prices are taking their toll. We expect a fall in private consumption, both in Europe and the US. Real wages are falling in many countries, extra savings accumulated during the quarantine are being used up, interest rates on credit card debt in the US are at historically high levels. Little is stopping reduced consumption due to high energy prices. Some reports already speak of an oversupply of containers as more and more empty containers remain in their depot.
In addition, eventually, a less strict covid policy in China, could once again provide a positive supply shock. Although caution is advised here as a recent uptick in covid infections seems to prevent a rapid easing and can lead again to lockdowns and problems in harbours.