How crowded will ports be?
Prices, wages, transport. What is happening to the world economies. The analysis by Bob Stoutjesdijk, Strategist and Portfolio Manager Global Macro Fixed Income at Robeco
Inflation has been the subject of heated debate since the start of the pandemic. In the US, headline inflation may have peaked, but perhaps not yet in the Eurozone and the UK. Furthermore, the decline from the peak may be slow and may appear stalled at first, thus keeping central banks concerned about the possibility of a persistent spiral of inflation expectations and higher wages. This also implies that inflation uncertainty, especially as to where inflation settles, is likely to remain high in the coming quarters.
Supply chain disruptions and inflation
Disruptions to global supply chains due to the pandemic have been a source of upward pressure on inflation, especially the goods component, over the past two years. In our view, supply chain disruptions peaked in October 2021, but the easing of bottlenecks has stalled since March 2022. The main reasons are the decline in Chinese semiconductor production (-12% month on month to March) due to Covid restrictions, and European auto production suffering from a shortage of wiring harnesses due to the war in Ukraine. War and sanctions on Russia by restricting the supply of essential inputs such as fertilizers and grains are likely to amplify the surge in global food price inflation.
One area where we have seen improvements is port congestion. Long ship queues formed in ports such as Los Angeles and Long Beach between June and October 2021. Now these queues are almost back to normal. Concrete measures such as creating space by removing (empty) containers from the port, financial incentives to work on weekends and determining queuing when ships leave the port of origin have been helpful in reducing congestion. Another positive that is worth mentioning is the so far limited impact of Covid restrictions on Chinese export shipments. Although the number of ships exiting the port of Shanghai has decreased, other Chinese ports have been able to replace it. But there remains a high degree of imbalance in the demand for Asian goods relative to the Asian and Chinese demand for goods produced outside Asia. This imbalance is at the root of the continuing shortage of containers for shipments outside Asia and helps explain the still high container freight rates.
Car prices have been a major source of inflation, as evidenced by rising prices for new and used vehicles, rental and insurance costs. It is therefore encouraging that auto production plans in the United States have recently returned to expand, reaching pre-pandemic levels and departing from the ongoing disruptions that are plaguing European manufacturers.
The shortage of semiconductors has been a major bottleneck in the production of many goods. These shortages continue, but semiconductor manufacturing has accelerated and is now 19% above the level that would have been expected based on the pre-pandemic growth trend. With continued investment in the chip industry – we have seen a 55% increase in capital spending since the pandemic – it is possible that by 2023 there will be an oversupply of computer chips.
The interaction between wages and inflation
Wage growth in the United States (around 4.7%) is outpacing that of the Eurozone (around 2%). Part of this difference can be explained by the political response to company closures at the onset of the pandemic. US policy focused on income support, while European plans were aimed at preserving jobs.
It is difficult at this stage to judge how significant the risk of a wage-price spiral is, but we believe that this risk is greater in the US than in the Eurozone. The Eurozone has a long history of relatively low wage growth and inflation, which could help limit the pace of rising wage demands from now on. If you look at the upcoming wage deals, wage growth in the Eurozone is likely to stay within the range of the past 20 years. The situation is slightly different in the US and the UK, where inflation and wage growth have been more volatile over the past decade. That said, high headline inflation in the Eurozone has started to raise inflation expectations, including consumer expectations. Therefore, the risk that rising inflation expectations will translate into persistent wage growth should not be overlooked. It seems that the "hawks" of the ECB are increasingly aware of this.
Globalization, deglobalization and inflation
The globalization of value chains and China's integration into the world economy have acted as a brake on commodity price inflation in recent decades. A scenario of “slowbalization”, that is of slower globalization, and more hypothetically of deglobalization, could be a reason to expect a slightly higher future inflation.
Energy transition and inflation
When thinking about the overall inflationary effects of the energy transition to achieve net zero greenhouse gas emissions, ECB Executive Board member Schnabel argues that it is useful to distinguish between three shocks. This is "climateflation", ie the increase in costs due to climate change itself (such as increases in food prices caused by severe weather events); of "greenflation", ie inflation due, for example, to the increase in the prices of raw materials used in green technologies, and of "fossilflation", which represents the cost inherited from dependence on fossil energy sources.
Regarding this latest shock, the increase in green energy investments has been too slow compared to fossil energy divestments over the past five years. A further delay in green investments – the EU is discussing a 200 billion euro package for the period 2022-2030 – is therefore one of the channels through which the energy transition could contribute to the increase in future inflation.
The carbon tax could be a relatively effective way to stimulate the transition in demand from fossil fuels to green energy. We believe that effective carbon taxation would add about 0.25% per annum to US inflation and 0.1% to German inflation over a period of at least three years. Emission caps and a fixed minimum percentage of renewable energy sources would be less effective in achieving this transition and would have a greater inflationary effect. Other channels through which the energy transition could be fueling inflationary pressures include a potential wage-price spiral resulting from the shortage of qualified personnel to carry out the transition process.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/quanto-si-ingolferanno-i-porti/ on Sun, 26 Jun 2022 06:08:03 +0000.