As recently as July, economists, business leaders and consumers were confident that the economic recovery from the pandemic would continue through 2021 and beyond. Widespread vaccination would ease labor shortages. Workers, students, and teachers would return to offices and schools. Business and leisure travel would rebound.
The rapidly spreading delta variant dashed those optimistic assumptions. Now, businesses are renewing mask and distancing policies, schools are reeling from outbreaks among students, and concert tours are being canceled. Hawaii is telling tourists not to come, and the EU is urging member nations to bar non-essential visitors from the U.S.
Economists don’t expect the delta outbreaks to push the U.S. back into a recession. But delta will impede the recovery of jobs lost in the pandemic and slow business growth. Along with rising inflation, the shock of the Afghanistan debacle, and floods and fires around the globe, the delta outbreaks have caused Americans and people all over the world to lose their brief optimism and face Fall with somber uncertainty.
Taking stock of these breaking trends as well as developments specific to supply chains, Resilinc CEO Bindiya Vakil recently issued the firm’s outlook for the next six to 18 months. Here is an overview:
H2 2021: Recovery, disrupted
Resilinc agrees with economists and analysts who forecast a dampening of the recovery through 2021. Supply chain disruptions will not abate significantly from the H1 2021 peaks chronicled by Resilinc’s EventWatch. “Resilinc’s data show the rate of disruption in the second half tends to be higher than the first half,” Vakil said. This is usually due in part to the Atlantic hurricane season, but this year, COVID-19 outbreaks and the unrelenting congestion in logistics are compounding the usual seasonal trends. (These developments are covered in more detail in our recent blog post: Delta outbreaks spur supply chain woes)
To adapt to these disruptions, OEMs and retail chains are seeking to procure holiday goods earlier than usual—which is contributing to the shipping congestion. Commodity and raw materials shortages won’t ease before the end of the year—and the semiconductor shortage will endure into 2022 and beyond. “There simply aren’t any near-term solutions to re-balance supply and demand in the semiconductor supply chains and markets,” said Vakil in a recent Resilinc webinar.
These challenges notwithstanding, 2021 will wind up with strong global growth over 2020’s pandemic-fueled decline. Forecasters such as IHS Markit and Oxford Economics have downgraded their 2021 forecasts in the last several months, but they are still forecasting YOY growth of about 6%.
12-to-18-month outlook is mixed
The pace of recovery in 2022 depends a great deal on worldwide vaccination rates and the spread of delta and other variants. As of this writing, the IMF has forecast global GDP growth of 4.9%, while Oxford Economics has issued a risk-weighted projection of 4.4%.
From the supply chain perspective, Resilinc expects the topsy-turvy demand swings – that characterized the second half of 2020 and first half of 2021 – to stabilize. But major challenges from delta outbreaks in vital supplier nations such as Vietnam must be resolved with vaccination campaigns for consistent recovery in supply chain reliability.
As mentioned above, semiconductor shortages will continue through the year and beyond.
Other trends to watch include:
Climate change: transition risks, physical risks
The droughts in the U.S. and Taiwan and floods in Germany earlier this year underscore the physical risks of a changing climate. Such risks are increasing, and careful supply chain managers should be factoring these risks into their long-term sourcing decisions. Given the uncertainties in climate and weather, it’s exceedingly difficult to forecast how extreme weather events will disrupt supply chains in 2022 or any specific year; but the long-term trends are clear and supply chain professionals should be conducting multiple “what-if” scenario analyses for climate risks.
The second major type of climate risk—and a category that can be tracked with more accuracy—are the risks that products and production methods will become more expensive or even prohibited by government climate change policies. A key example of these “transition risks” is the proposal by the European Commission to require importers of steel, aluminum, cement, and other carbon-intensive products to buy EU carbon allowances for any products they export to the EU.
ESG risks rising
On a related theme, environmental, social and governance (ESG) issues will continue to loom larger for supply chain managers in 2022. Global supply chains are under increasing scrutiny for forced and exploitive labor practices as well as environmental degradation. Resilinc’s EventWatch is detecting growing numbers of potential ESG issues at suppliers across the world. “That doesn’t mean that that supply chains are becoming more exploitive, but rather it’s due to the increased scrutiny from NGOs, cellphone videos on social media and in many cases increased government regulation and enforcement,” said Vakil.
Reshoring and China in the spotlight
Any discussion of ESG issues in supply chains must include China. Human rights groups accuse the government of detaining more than one million Uyghurs and forcing hundreds of thousands of them to work in forced labor conditions in Xinjian province. The government is pushing back vigorously against these claims, and many global companies are caught in the middle.
Xinjiang is helping drive the conversation in corporate management about reshoring production from China to the U.S.—or at least closer to home. China’s dominance of critical minerals such as lithium, cobalt and tantalum were cited in the Biden Administration’s spring 2021 report on supply chains.
Yet, as discussed frequently in Resilinc’s blog, China’s manufacturing expertise, vast workforce, unmatched logistics and other factors give supply chain managers many reasons to continue sourcing from there. And even when final production or assembly is procured elsewhere, the non-Chinese suppliers are often still dependent on Chinese parts and materials.
China is also a fast-growing market for U.S. and European companies. For these and other reasons, supply chains will remain in China and other Asian countries for many years; at the same time, many supply chain organizations will increase their efforts to find alternatives.
Vakil and her colleagues Tom Linton and Dale Rogers have championed what they call a “Pan American manufacturing ecosystem” that could reduce freight costs, provide the manufacturing labor force that is unavailable in the United States, take advantage of the free trade agrements USMCA and CAFTA-DR and help alleviate poverty in Central America. Resilinc expects to see government partnerships for Pan American near-shoring initiatives emerge in the next 18 months, although infrastructure investments to improve logistics will take many years.
“While the outlook through 2022 is full of risks, I am an optimist at heart,” said Vakil. “There has never been a more exciting time to be in supply chain management. Our generation of supply chain professionals and those coming after us will design the supply chains of the next 30 years.”