Jeremy Moody's Blog 3rd September 2021: Supply Chains

This article by Jeremy Moody first appeared in the CAAV e-Briefing of 2nd September 2021

From the start of the pandemic, the Government’s concern has been to maintain contracts and activity in the economy. It has done so with measures such as the furlough scheme protecting employment contracts and grants and loans to tide businesses through. The resilience of the food supply chain passed its test last spring. As lockdown has eased, so the economy regained ground and unemployment stayed low.

However, we are now deep into the next stage of dislocation. The links that bind the global economy, supplying materials and components for processing and distribution, are fraying locally and internationally under the pressure of the pandemic. As different major economies recover and relapse at different rates, world shipping is disrupted with container units half a cycle out from where they are needed; gas and electricity prices are in a similar vortex.

For some supplies, the issue is now not price but availability. Timber, steel, machinery, cardboard and much else are affected. Computer chips diverted in the lockdown to consumer electronics deny key components to carmakers; showrooms now desert reviving agricultural shows.

With issues dramatised by the Evergiven blocking the Suez Canal, major Chinese ports are down with the virus while large numbers of ships wait offshore; the world is now short of ships. Elsewhere, containers pile up unopened, some with perishable goods. Supply and demand see the price of containers for some routes increased ten-fold. The Baltic Dry Index, measuring the cost of shipping raw materials, is now as high as it has been since the financial crisis (and ten times as high as five years ago).

This should correct itself in time but that time may now be well into next year, already making Christmas a challenge.

That is now compounded by issues in the labour market, from chefs to lorry drivers, partly with virus restrictions and partly as some retire or choose other work. The UK has also lost some workers from central Europe. That prompts wage increases (with differentials an issue) in sectors like food processing, haulage (where rates had slipped) and catering, improved conditions and, in time, more automation. To date, this appears more of a rebalancing than sustained inflation, with the pandemic accelerating as much change in these markets as in the physical retail sector.

As 18 months ago, we are testing resilience and flexibility in the face of a fast changing and time exercise in economics, setting the shape of our future economy.