In this Supply Chain Matters commentary, we highlight the latest OECD global economic forecast in the ongoing light of the Ukraine conflict and provide some additional industry supply chain implications.
The Organization for Economic Cooperation and Development (OECD) has trimmed its prior global GDP growth forecast as a result of the ongoing Ukraine conflict and its subsequent impacts on global markets.
In its latest March 2022 update, the agency states: “The most important consequence of the war in Ukraine is the lives lost and the humanitarian crisis associated with the huge numbers of besieged and displaced people. There are also, however, numerous significant economic implications.”
Noted is that prior to the ongoing conflict, most global macroeconomic variables were expected to return to some form of normality during 2022-23 following the Covid-19 pandemic.
It this agency’s prior December 2021 forecast, OECD had forecasted that global GDP growth would moderate to 4.5 percent this year, and 3.2 percent in 2023, after growing an anticipated 5.6 percent in 2021. This latest updated forecast indicates that model simulations suggest a sizeable impact to global growth as well as the threat of higher prices, as much as a reduction of one percent GDP growth this year, and global inflation rates raised to upwards of 2 ½ percentage points in the first full year of the conflict.
There are additionally the usual downside caveats that include further imposition of sanctions or consumer and business boycotts related to Russia. European economies are expected to be the hardest impacted. Emerging economies are reportedly expected to experience added rates of inflation as higher food and energy prices push inflation rates higher than in advanced economies.
Industry Supply Chain Implications
A one percentage point impact on global economic growth comes with the usual implications, including lower product demand for some segments, and supply network impacts for various industries.
The OECD report reinforces that both Ukraine and Russia are large producers and exporters of key energy, minerals and basic food commodities.
Sizeable economic and financial shocks are already in-play. The two countries together reportedly account for upwards of 30 percent of global exports of wheat, 20 percent of corn, mineral fertilizers and natural gas, and 11 percent of oil. They are the commodity fabric of certain industry supply chains. “In addition, supply chains around the world are dependent on exports of metals from Russia and Ukraine. Russia is a key supplier of palladium, used in catalytic converters for cars, and nickel, used in steel production and the manufacture of batteries. Russia and Ukraine are also sources of inert gases such as argon and neon, used in the production of semiconductors, and large producers of titanium sponge, used in aircraft. Both countries also have globally important reserves of uranium.”
Further noted by OECD:
“The war in Ukraine has created a new negative supply shock for the world economy, just when some of the supply-chain challenges seen since the beginning of the pandemic appeared to be starting to fade. The effects of the war will operate through many different channels, and are likely to evolve if the conflict deepens further.”
In a prior Supply Chain Matters posting posted two weeks ago, we highlighted for readers a report indicating that commodity markets were already soaring as speculators took positions as to market moves.
As communicated in our prior commentary, threat assessment, risk identification coupled to sensing, responding and agility to events reign for businesses and their supply chain management teams in the coming weeks, as is strategy and tactics related to assuring supply network resiliency and enhanced direct control of supply networks. Beyond obvious supply network impacts, the threat of added inbound cost inflation looms large, since added price increases for end products adds to the vicious cycle of inflation and subsequent demand contraction.
Anticipate higher interest rates in the U.S. and perhaps other regions. Purposeful and active inventory management is now a requirement especially with so much inventory still in transit to end markets. Concurrent and business impact focused planning processes well, as is added emphasis on what-if scenario-based decision-making.
Caution, resolve and risk mitigation are the marching orders for industry supply chains in the coming weeks and months, as is taking good care of workers.
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