Experts say lockdowns in China will make inflation and supply chain nightmare worse
Experts say the strict lockdowns imposed by China due to COVID-19 will exacerbate global supply chain problems and increase inflation in the coming months.
President Xi Jinping’s COVID-free policy is being tested as the country struggles to tame the worst outbreak of the virus to date. Frustration is growing with food shortages, people being locked in their homes for weeks, and the policy of killing pet dogs suspected of having COVID.
While China’s Shenzhen tech hub emerged from a nearly month-long shutdown, Shanghai, China’s largest city, home to the world’s largest container port, has remained closed since March 28.
Now, the economic effects are starting to show. Sources told Bloomberg on Friday that fuel demand in China is on track to decline 20% this month in the biggest drop since the first wave of COVID-19 lockdowns in more than two years. And global supply chains are starting to feel the crunch, too.
Supply Chain Nightmare
One in five container ships are now stranded in ports worldwide, with 30% of the backlog coming from China. Lars Jensen, CEO of shipping container industry consultancy Vespucci Maritime, said: luck The full impact of China’s policies will only begin to reveal itself in the coming weeks.
“So far, most ships are still calling Shanghai as normal – meaning that shipments to Shanghai don’t end up in the wrong place,” Jensen said. But this is likely to change in the coming weeks if the lockdown is not removed. Then you will see more omissions of Shanghai as a port and sailing canceled, and [supply chain] The effect will increase.
Even if the strict lockdown in Shanghai is lifted, US ports will likely be hit by a wave of pent-up goods from newly reopened factories in China. That would drive up freight rates, and increase congestion at ports around the world, Jensen says.
Victor Meyer, director of operations at risk intelligence provider Supply Wisdom, believes it will take months for supply chains to return to normal, and he expects US ports to start experiencing disruptions soon.
“The following impact is likely to be felt in the ports of Los Angeles and Long Beach on the west coast of the United States as pent-up demand reaches them,” he said.
Another inflationary shock
Experts say problems at the ports mean higher costs for businesses and more inflation for American consumers.
Companies started to panic. Downstream impact is coming, and it will be heavy.” said John Berry, Chief Risk Officer at Supply Wisdom. “The recent lockdowns in China coupled with the Russo-Ukrainian War are a very heavy burden. Global chaos will exacerbate turmoil and raise inflation to a new level.”
The ground statement is backed up by recent reports from investment banks, which also warn of the economic impacts of the lockdowns in China. Bank of America analysts led by Ethan Harris said in a note to clients Friday that it is “another adverse supply shock to the global economy” that will dampen growth and prolong the period of high inflation.
Dylan Alperin, head of professional services at supply chain software company Keelvar, noted that transportation costs make up 7.7% of global GDP, meaning that delays at ports typically drive up inflation.
“The cost of shipping one container from China to the US has gone up from $5,900 last year to $1,764 today,” Alperin said. He added that the effect of these price increases alone could lead to a significant increase in inflation worldwide.
Dawn Tiura, CEO of Sourcing Industry Group (SIG), an association of procurement and sourcing professionals, said she also suspects the lockdown in China will drive up inflation.
“Our supply chains are so interconnected and become so fragile that one problem in one place will affect consumers around the world,” Teora said.
Jim Bureau, CEO of Jaggaer, a global procurement and trade technology company, noted that many US manufacturers are sourcing raw materials and components from Chinese suppliers, which could lead to shortages of critical electronics and machinery components.
China accounts for 18% of all goods imported by the United States, according to the Bank of America. And for computers and electronics, that figure goes up to 35%.
“The latest wave of lockdowns in China will only exacerbate supply constraints, with little effect on the supply of finished goods,” the office added.
This story originally appeared on Fortune.com