In the following commentary, Supply Chain Matters calls attention to the IMF’s World Economic Outlook lowering 2022 forecasted economic growth levels in its January forecast, and what this implies for supply chain management teams.
In our Ferrari Consulting and Research Group’s 2022 Predictions for Industry and Global Supply Chains Research Advisory report (Now available for complimentary downloading on our Research Center), we prefaced our report with summaries of global economic forecasts for 2022. The most widely followed in the World Economic Outlook, published by the International Monetary Fund (IMF).
In the October 2021 update of this IMF report, the global economy was forecasted to grow 4.4 percent in 2022, after growing an expected 5.9 percent for all of 2021.
The latest update to this report which published this week has now trimmed this year’s overall global economic growth by one-half a percentage point to 4.4 percent. What’s important for readers to focus on are the reasons for this adjustment, which are global supply chain focused on various dimensions. Also, that not more than one month into the new year, there is already significant adjustment.
The update headlines rising cases of the Omicron Covid-19 variant, disrupted recovery and higher inflation as headwinds to the prior forecast. The bulk of the percentage decline is attributed to two specific countries:
“A revised assumption removing the Build Back Better fiscal policy package from the baseline, earlier withdrawal of monetary accommodation, and continued supply shortages produced a downward 1.2 percentage-points revision for the United States. In China, pandemic-induced disruptions related to the zero-tolerance COVID-19 policy and protracted financial stress among property developers have induced a 0.8 percentage-point downgrade.”
Specifically related to the United States, the global agency reduced the 2022 GDP forecast by 1.2 percentage points to 4.2 percent. This is a rather significant adjustment. The Wall Street Journal noted that this was the largest downgrade for any major country or group of regions for which the IMF provides forecasts.
The revised forecast for China’s expected growth this year is now 5.8 percent, after an estimated 2021 growth rate of 8.1 percent.
An IMF blog post commenting on this week’s update and authored by Gita Gopinath, now Deputy Managing Director at the agency, indicates that 2022 inflation forecasts for both advanced and developing economies were raised, with elevated price pressures expected to persist for a longer period. “Supply-demand imbalances are assumed to decline over 2022 based on industry expectations of improved supply, as demand gradually rebalances from goods to services, and extraordinary policy support is withdrawn.” With persistent inflation expected to fuel higher interest rates globally, the commentary notes that with 60 percent of low-income countries already in or at elevated risk of debt distress, such countries will find it increasingly difficult to service such debts.
Among other observations, Ms. Gopinath’s mentions that China’s zero Covid tolerance strategy could exacerbate global supply disruptions, along with uncertainty as to whether China’s financial stress in the country’s real estate sector spreads to the broader economy. Further cited are rising geopolitical tensions and social unrest as also posing downside risks to the outlook. This week’s headlines related to growing concerns that Russia will invade the country of Ukraine is indeed an example of such geopolitical tensions.
There is further the recurring theme that many challenges facing the global economy are dependent on breaking the hold of the pandemic. Only 4 percent of the population of low-income countries are fully vaccinated versus 70 percent in high-income countries.
Added Supply Chain Matters Insights
Supply chain management teams should indeed take note that less than a month into this new year, the IMF felt compelled to reduce its global economic forecast by a half of a percentage point. The notions of added warning signs and increased uncertainties occurring among the two largest global economies should be the concern of supply chain leaders and strategists.
The specific 1.2 percentage point reduction for U.S. growth prospects this year is especially concerning given that inbound materials are still clogging U.S. West Coast ports and intermodal transport modes including rail and truck. The risk of a bullwhip effect inventory bubble matched to decreasing product demand over the coming months is now more concerning.
Professor Yossi Sheffi, Director of the MIT Center for Transportation and Logistics indicated last week in a Linked-In posting that: It’s Time to Confront the Prospect of a Global Recession. His premise is that companies and their supply chain teams need to start thinking about how to prepare for a downturn that could be compared to the 2008 fiscal crisis. His observations draw similar parallels as to what occurred in the lead-up to the 2008-2009 global recession, including inventory bullwhip effects.
While we would not go as far as to being able to predict the coming of a global-wide recession, Sheffi’s guidance for supply chain management teams should be considered. Activities such as more heightened analysis of existing inventory management strategies relative to product demand levels to ascertain bullwhip effects, addressing elements of vulnerability in supply network resiliency and prioritizing customers are indeed advisable.
As to what occurred throughout 2021, business as usual no longer exists for supply chain management teams. It is all about abilities to continuously pivot to economic, customer and supply network developments.
Bob Ferrari
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