WEU Special Topic - The economic impacts of global supply chain disruption

Special topic: The economic impacts of global supply chain disruption

Strong demand for goods in the wake of the COVID-19 pandemic has driven up freight costs, boosting consumer price inflation and putting pressure on businesses. Ports around the world are congested, and competition for limited shipping space has caused challenges for exporters, with smaller producers more likely to miss out and be unable to deliver to customers. New Zealand's trade has been resilient to the disruption, though there is a risk that global connections will be lost and long-term growth will be reduced.

Strong demand and constrained supply have boosted prices…

One consequence of the COVID-19 pandemic has been a sharp lift in global demand for goods, as consumers substituted away from in-person services. The global supply chain has struggled to keep up with this additional demand, given the long lags involved in expanding shipping capacity, causing freight prices to rise dramatically.

A similar dynamic has also pushed up global commodity prices, as food security concerns have led buyers to stock up on agricultural goods at a time when global agricultural production has been relatively constrained. This has resulted in near-record high prices for New Zealand's major commodity exports (Figure 1).

Figure 1: Commodity and freight prices

Sources: ANZ, Baltic Exchange/Haver

…putting cost pressure on NZ businesses…

High freight costs mean that importers are paying significantly more to have goods shipped to New Zealand. A 20-foot container from Shanghai to NZ, which cost around US$500 prior to the pandemic, was costing businesses around US$5000 in September. This is adding to inflationary pressures as some retailers pass on the additional cost to consumers, while reducing margins for businesses who are unable to pass on the cost.

Global commodity prices have also increased to record highs, boosting export returns. While exporters may not be formally responsible for paying the cost of freight, higher prices act like a tax with the cost burden falling on whichever party (buyer or seller) has the least bargaining power, meaning some exporters will be at least partially footing the bill for high freight costs.

…and driving high inflation around the world

Supply chain congestion and elevated freight costs are contributing to high consumer price index (CPI) inflation around the world, including in New Zealand where annual CPI inflation reached 4.9% in the September 2021 quarter (Figure 2). Delays and shortages of materials are also weakening economic activity, stoking fears of ‘stagflation' (stagnant economic growth and high price inflation) in the global economy, and central banks may be forced to raise interest rates earlier than expected if inflation continues to rise.

Figure 2: Consumer price indexes

Source: Haver

Port congestion results in long delays…

Elevated demand for goods and a limited number of ships has resulted in increased volumes of cargo per vessel. This has meant that each vessel requires a longer period of time in port to unload, resulting in backlogs of ships waiting to enter ports and creating congestion throughout the global supply chain. In New Zealand, overall import and export volumes have recovered from the initial shock in mid-2020, with both exceeding pre-pandemic levels by the start of 2021 (Figure 3). Ships are visiting our ports less frequently, however, and carrying more cargo per vessel, creating congestion as in other parts of the world.

Figure 3: Goods trade volumes and prices

Source: Stats NZ

Domestic ports have suffered additional challenges, with Ports of Auckland (POAL) having to delay a planned automation project and struggling with labour shortages after COVID-19 disrupted the flow of migrant workers. Productivity at POAL has improved recently, prompting shipping lines to remove congestion surcharges that had been in place since November 2020.

…causing challenges for exporters…

Overseas demand remains strong, but some sectors are missing opportunities due to supply chain disruption. There have been reports of exporters struggling to get hold of empty containers and space on ships, with smaller producers more at risk of missing out and being unable to deliver goods to customers. Larger exporters have generally been able to secure space or charter their own vessels to avoid disruption, meaning the aggregate data have not shown a significant impact on export volumes.

…with impacts varying by sector

New Zealand's largest export sectors have performed well following the initial shock in mid-2020 (Figure 4), masking the poor performance of other significant goods exports like mechanical machinery, aluminium, apples[1] and fish, which make up around 7% of total goods exports. Meat, dairy, kiwifruit and forestry, which comprise just over half of the total, have recovered in quantity terms and benefited from rising prices in 2021.

Figure 4: Goods export values, 12-month sum

Source: Stats NZ

The strength in New Zealand's major goods exports has supported aggregate goods export values to be 2.7% above 2019 levels in the year ended September 2021, despite a rise in the NZD exchange rate. In contrast, the sum of other goods export values (excluding meat, dairy, kiwifruit and forestry) has been relatively flat since the onset of the pandemic and in the year to September 2021 was 0.3% below the 2019 year.

The outlook is uncertain…

Industry commentators believe that only a slowdown of consumer demand will allow the supply chain the necessary time to catch up, thereby easing the disruption. Forecasters expect disruption to extend throughout 2022 as sustained high container demand slows progress in clearing freight backlogs. Domestically, the shift towards the COVID-19 Protection Framework is expected to reduce the likelihood of strict lockdowns, meaning the risk of further disruption in the domestic supply chain is lower, although the tight labour market points to ongoing labour shortages until border restrictions ease. With these restrictions expected to ease in 2022, greater inward migration will likely reduce the severity of labour shortages in the supply chain and primary industries.

…and while NZ trade continues to be resilient…

Experimental goods trade data from Stats NZ give a high-frequency reading of trade values. After rising unusually high in June and July, export values have fallen back in line with normal seasonal trends and been consistently above 2019 and 2020 levels since September (Figure 5). Log volumes fell below previous years' levels in August and September, which is to be expected given that forestry businesses could not operate at Alert Level 4, but had recovered by October.

Figure 5: Goods export values (4-week m.a.)

Source: Stats NZ

Import values, meanwhile, remain elevated compared to previous years, and have shown little sign of slowing in the face of the August Delta outbreak (Figure 6). Higher prices may be driving part of the increase in import values, though ports in New Zealand are also reporting high volumes of imports. Demand for goods clearly remains robust, including capital goods used by businesses, reflecting confidence in a strong economic recovery once vaccination allows restrictions to ease.

Figure 6: Goods import values (4-week m.a.)

Source: Stats NZ

…and freight prices appear to be easing…

As shown in Figure 1, global freight prices have fallen in recent weeks. This reflects an easing in container traffic as the pre-Christmas peak in international shipping comes to an end. It is unlikely that freight costs will return to pre-pandemic levels as the shift toward more containers per vessel is expected to persist, resulting in a less efficient and therefore more expensive global supply chain.

…disruption could reduce long-term growth…

The impacts of supply chain disruption, combined with the ongoing uncertainty that the pandemic brings, will likely be damaging the confidence of internationally-facing businesses. This effect will be particularly severe for smaller businesses who do not have firmly-established relationships with international partners and lack the resources to absorb higher costs. The overall impacts are difficult to quantify but can be understood as a loss of long-term potential growth as investments are foregone, businesses are forced to exit, and potential businesses are reluctant to enter.

While strong performance from New Zealand's largest export sectors and a record high terms of trade will likely continue to support aggregate export values, the impact of supply chain disruption on smaller exporters will mean that growth is weaker than it otherwise would be. This loss may have already been realised to some extent, with half of New Zealand's goods export sector (Other Goods in Figure 4) experiencing zero growth since the onset of the pandemic after growing 8.3% in the two years prior.

…and put NZ's international connections at risk

An ongoing risk for New Zealand will be the loss of international connections if global supply chain disruption persists. Given the country's relatively small market and geographic isolation, some trading partners may shift away from New Zealand to focus on closer markets where trade is more convenient. Some export sectors have already experienced challenges accessing previously reliable overseas markets, and fear that these connections could be damaged permanently. The longer disruption persists, the greater the risk that international trade becomes less globalised and New Zealand loses important connections, with significant implications for the domestic economy.