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Supply chains that rattled the global economy through the pandemic are unleashing another shock as efforts to choke off trade with Russia strain resources ranging from fertilizer needed for crops and palladium for car-making, to oil that’s used to produce almost everything.
The upshot: a world economy that again faces the prospect of stagflationary forces as inflation quickens and growth fades, compelling central banks to choose which to tackle while fearing the challenge they don’t take on then gets out of hand.
The choice is even starker now than it was during the early days of the pandemic. Back then, monetary policy makers elected to buoy demand as a recession hit. Now inflation is at multi-decade highs, forcing them to focus on runaway prices, although perhaps alert to the risk they may have to move more slowly than anticipated.
“Were this 2022 supply shock a first, central banks would be more confident of its transitory inflation impact,” said Alan Ruskin, chief international strategist at Deutsche Bank AG. “But this is an inflation shock compounding pre-existing evidence of sticky inflation, so adding to concerns that policy will have to treat attendant higher prices as more than a temporary phenomena, even if growth slows.”
Already, signs are mounting that supply lines are fraying anew as the sanctions-driven economic blockade increases President Vladimir Putin’s reliance on domestic production and prevents Russian companies from reaching markets and investors abroad.
Almost all of the 10-largest container shipping companies — responsible for moving some 80% of global trade — have stopped accepting bookings for Russian cargo and ports from Europe to the U.S. are turning away the nation’s vessels. Some companies are choosing to self-sanction by refusing to buy Russian commodities, even if it remains legal to do so.
The fallout is extending far beyond Russia and Ukraine, with Copenhagen-based A.P. Moller-Maersk A/S, the world’s No. 2 container carrier, warning customers “this is a global impact, and not only limited to trade with Russia.” On Friday, Maersk suspended new intercontinental rail bookings, both east and westbound, between Asia and Europe.
For auto makers, the dependence on Russian supplies is deep. The country is the third-largest supplier of nickel in lithium-ion batteries and provides 40% of the palladium for catalytic converters, with that metal also impacted by widespread flight bans. About 90% of U.S. semiconductor-grade neon supplies comes from Ukraine, according to Fitch.
Toyota, Honda
Japan’s biggest carmakers joined the widening global corporate pullback from Russia, following the likes of Ford Motor Co. Others in closer proximity to the war such as Germany’s BMW AG and Volkswagen AG are warning of production outages. Shares of Renault SA, the European carmaker most exposed to Russia, have tumbled almost 25% since the invasion began.
In the U.S., Boeing Co. is in a bind after the U.S. banned flights by a Russian-operated company it relies upon, meaning it can’t transport some structures from other places to its main wide-body plant in Everett, Washington.
Titanium is the other vital input for the aerospace industry, with firms stockpiling the key material and looking to diversify away from Russia. Engine maker Safran SA gets almost half of its titanium from Russia’s VSMPO-Avisma Corp., while Rolls-Royce Holdings Plc said 20% of its titanium comes from the country.
The isolation of a commodities powerhouse also has prices for fuel and food soaring. Oil, of which Russia produces more than 10% of the world’s output, is now topping $110 a barrel, while European natural gas hit an all-time high this week. Wheat soared past $11 a bushel to the highest level in 14 years.
Even prices for the widely used nitrogen fertilizer urea surged over the past week, drawing howls of protest from farmers as far afield as Iowa and Brazil.
For China, trade with Russia poses new risks, costs and potential obstacles. Railway transport from China through Russia is currently in operation, said Mark Ma, the owner of Seabay International Freight Forwarding Ltd., a company that handles Chinese goods sold on platforms such as Amazon.com Inc.
However, some logistics companies have decided to stop shipping out goods because the journey takes time and any uncertainties linger in the process of transit arrangement, customs clearance, goods safety as well as payment collection.
Ma said his company has seen a reduction of available seaborne shipping capacity, which could increase the demand for land routes.
All told, the mounting supply chain crisis could end up being enough to knock $1 trillion off the value of the world economy and add 3% to global inflation this year, according to the U.K.’s National Institute for Economic Research.
“The conflict in Ukraine imposes further economic stress on a system stretched by Covid,” said Jagjit Chadha, director of NIESR. “Supply chains will be further fractured, and monetary and fiscal policies put under a severe examination.”
What Bloomberg Economics Says…
“Russia’s invasion of Ukraine has upended the European economic outlook. The extreme level of uncertainty calls for caution and we expect that to be reflected in the European Central Bank’s policy meeting on March 10.”
— Jamie Rush (economist)
Of course, Russia still had the most to lose with its output set to be almost 10% lower annually in the long term than if trade relations hadn’t changed, according to data from the Kiel Institute for the World Economy and the Austrian Institute of Economic Research.
But around the world, economists are also raising their forecasts for inflation and cutting those for growth. JPMorgan Chase & Co. economists now see global growth of 3.1% on a fourth quarter to fourth quarter basis, down 0.8 percentage point since Feb. 18. And they forecast inflation of 4.6% in the final three months of the year, up 0.9 percentage point.
At issue for central banks are the tradeoffs between raising rates to offset a supply-side inflation jolt they aren’t equipped to fix, just as those pressures weigh on consumers spending and corporate confidence.
“The key question mark is global monetary policy makers’ response: Will they prioritize economic growth amid elevated uncertainty or opt to tighten monetary policy even faster due to the inflationary shock,” said Tuuli McCully, head of Asia-Pacific economics at Scotiabank.
The betting of most is that they will still focus on restraining inflation before it becomes entrenched in their economies. The Organisation for Economic Cooperation and Development reported on Thursday that inflation averaged 7.2% across its members in January, the most since 1991.
Circa 1970s
“Policy makers need to adjust policy in the same way as they eventually did following the averse oil supply shocks of the 1970s, which is to lift rates,” said Steve Barrow, head of FX strategy at Standard Bank.
U.S. Federal Reserve Chair Jerome Powell on Wednesday signaled a quarter percentage-point hike in interest rates this month, joining a chorus of central bankers raising rates around the world as they try to cool inflation.
As he was speaking, Bank of Canada Governor Tiff Macklem was already beginning what may turn out to be a series of rate increases. Hungary followed the next day.
Having hiked twice in recent months, Bank of England officials are warning that the fallout from the attack on Ukraine will potentially upend the outlook for the U.K. economy, although they still seem on track to act again this month.
Still, the invasion’s fallout is likely to deepen a policy divergence as some push up borrowing costs and others either slow their tightening, or stay on the sidelines for now.
The war muddies the outlook for the European Central Bank, which had been tip toeing toward constraining monetary policy, but whose economy is more closely-linked to Russia’s than most. Having previously flagged next week’s meeting as a decisive one for the future of policy, officials are now more likely to stay in a holding pattern
In Asia, the Bank of Japan continues to support the economy while the People’s Bank of China is cutting interest rates.
It’s not only the central banks thinking about the economic aftershocks. The war will also force European governments to borrow more to pay for an influx of migrants and strengthen their armies.
Gary Luk, who runs a Hong Kong-based freight forwarding company, said about 20% of his business has been affected by the war because it involves organizing cargo including audio equipment and electronic gadgets to be flown or shipped from China to Eastern Europe.
Plunging currencies mean his clients in Russia and Ukraine face skyrocketing costs to pay for his service in U.S. dollars, so they are delaying payment, Luk said. Overdue payment has amounted to a six-digit figure in dollars, putting increasing pressure on his company’s cash flow, he said.
“Now we don’t dare to accept new orders from the region,” Luk said. ”We’ve already been suffering from rising charges by airlines and shipping companies, and the war now is adding insult to injury.”
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